Good Customers Only By Gary McWilliams – The Wall Street Journal Brad Anderson,

Question

Good Customers Only By Gary McWilliams – The Wall Street Journal Brad Anderson, chief executive officer of Best Buy Co., embraced an unorthodox notion for a retailer recently. He wanted to separate the “angels” among his 1.5 million daily customers from the “devils.” Best Buy’s angels are customers who boost profits at the consumer-electronics giant by snapping up high-definition televisions, portable electronics, and newly released DVDs without waiting for markdowns or rebates. The devils are its worst customers. They buy products, apply for rebates, return the purchases, then buy them back at returned-merchandise discounts. They load up on “loss leaders,” severely discounted merchandise designed to boost store traffic, then flip the goods at a profit on eBay. They slap down rock-bottom price quotes from Web sites and demand that Best Buy make good on its lowest-price pledge. Best Buy estimates that as many as 100 million of its 500 million customer visits each year are undesirable. Best Buy rolled out its new angel-devil strategy in about 100 of its 670 stores in 2003. It examined sales records and demographic data and sleuthing through computer databases to identify good and bad customers. To lure the high spenders, it stocked more merchandise and provided more appealing service. To deter the undesirables, it cut back on promotions and sales tactics that tend to draw them, and culled them from marketing lists. The new policy has proved to be effective in some of the pilot stores.

Analyze the new policy using the theory of adverse selection. Use theory of moral hazard to explain the shopping behavior of the "devils." Has the use of internet increase or decrease information asymmetry? Explain.

Explanation / Answer

Theory of Adverse Selection:

A moral hazard is a situation where a party will take risks because the cost that could incur will not be felt by the party taking the risk.

Devils, (however I personally do not like these terms please do not declare a person as angel or devil on the basis of monetary profit it can give you or loss you may get due to him.) will not make use of purchasig and returning after this policy as they were doing earlier because they will not given options like refund or purchase discount on refunded items.

The process by which the price and quantity of goods or services in a given market is altered due to one party having information that the other party cannot have at reasonable cost.

This new policy is creating an environment whereby consumers do not get complete information about the products, discounts and marketing. It leads to inrease in profits of these companies but it is unethical and is not desirable from society's point of view. What are being called devils in the case are actually lower middle class people who have high marginal utility for each dollar spent. These people are more conscious in spending their money and hence are more calculatve. This s not a crime ot look at best deals, gathering all infomation, seeking maximum discounts etc. Hence, policy may be appreciated from a capitalist's perspective but not from a societal angle.

Certainly internet has decreased information asymtery. Websites do not distnguish between good cusotmers and bad cusomers as they are defined in given case. If on any search engine, I type key words, it will give same information irrespective of my income group and preferences. Hence

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