Question

1. Market forces usually put pressure on prices to adjust to equilibrium; surpluses and shortages are generally undesirable by both buyers and sellers. But occasionally, you can observe firms knowingly setting prices above or below the equilibrium price. One example is the market for sneakers, where “a sneaker might cost $200 at retail and might sell for $1000 on the secondary market, just because of that difference between supply and demand.”
   1. Why do you think a company like Nike would find it beneficial or advantageous to sell its sneakers at a retail price that is so far below the market equilibrium price?
   2. Do you think Nike would likewise set its employee wages significantly below the market equilibrium wage?
   3. Can you think of some reasons why Nike might choose to pay its managers a wage that is above the market equilibrium wage for comparable managers?

Answer 1

a. A company like Nike would find it beneficial to sell its sneakers at a retail price that is so far below the market equilibrium price in order to seek a new customer base, who have not tried their products before. By selling the sneakers below the equilibrium price it will try to increase its market share so that other companies would have to follow and reduce their prices as their products won't sell. Secondly as it is a well known brand, it could act as a market player by reducing the price, wherein other firms also have to reduce their equilibrium price, as it is a market player it can afford to reduce the price, whereas other brands don't as their costs are too high, this leads to less competition as the new firms exit the market because of the low price as it is not profitable for them to survive.

b. No, it wouldn't set the employee wages far below the equilibrium price because than there would be involuntary unemployment as no one would be willing to work at a low wage. Nike would instead pay a higher wage and employ few number of experienced people in its workforce.

c. Nike wants to have an edge in terms of sales, as it is a global brand, Nike would most likely hire managers who are experienced and are paid a higher salary in order to seek talent. Thus in order to seek the best talent in its workforce so that its sales would increase organically, it would pay a wage which is greater so that the best come to work in its workforce and the company has a competitive edge.