Question

1. I have stressed that both buyers and sellers face incentives that result in market prices approaching equilibrium; neither buyers nor sellers find shortages or surpluses to be a long-term optimal outcome. But sometimes firms will deliberately set prices at a level they know to be higher or lower than the equilibrium price. One example (discussed in this TED Talk) is the market for sneakers, where shortages manifest every Saturday as “sneakerheads” line up to buy all of a store’s inventory of the latest limited release in minutes.
   1. Why might Nike find it preferable to sell its sneakers at a retail price that is obviously far below the market equilibrium price?
   2. Given the success of its low-price-sneaker strategy, how likely is it that Nike would attempt a similar below-equilibrium strategy for employee wages?
   3. Some companies have utilized a policy of paying managers a wage that is higher than the market equilibrium wage; what might be the rationale for such a policy?

Answer 1

a) Big companies like Nike often set a price lower than the market equilibrium price in order to obtain a larger market share in terms of customers and better market penetration. The technological advancement in their production processes allow them reduce price to such extent without suffering major loss in revenue.

b) Such below equilibrium policy in case of employee wages would not be profitable as the worker would refuse to accept any wage below the equilibrium wage determined by the market. This would lead to setback in the employment market of the company.

c) The managers of the company are sometimes paid higher wages than the equilibrium wage in order to provide them with incentive to work harder than the existing level and not to accept the job offers of other companies with better perks.