Fallacy of the $10 saving
You may have noticed outdoor advertising recently from a major furniture retailer promoting they have reduced the prices for some of their products, directly as a result of reductions in their costs. It’s something to the effect of, “Since our costs have decreased by $10, we pass on the full $10 saving to you in lower prices.”
While clearly consumers benefit from lower prices, the company also benefits from higher margins.
An example may help. Suppose a product costs about $70 to produce and sells for $100. The product’s profit margin to the producer is ($100- $70) / $70 = 43%. Now suppose the cost of the product dropped by $10 to $60, and the producer passes the full savings to the customer by selling it for $90. The product’s profit margin is then ($90 - $60) / $60 = 50%, an increase of 7%.
Because the producer now has a lower cost base, the profit margin is higher for the same absolute level of markup.
It’s a pity that the ads don’t mention this.
That’s not all they don’t tell you… http://www.economist.com/business/displaystory.cfm?story_id=6919139