Major American companies that used to manufacture their goods in the United Stat

Question

Major American companies that used to manufacture their goods in the United States are now manufacturing their goods in China because Walmart puts enormous pressure on the company to lower prices. This is because its practice is to tell a manufacturer what it will pay for a good. If the company wishes to sell its goods in a Walmart, it will lower prices. This is good for you because you get goods at a lower price. But, local companies may lay off employees either from the pressure of pushing price lower or from a Walmart moving into the neighborhood. Are lower prices worth it? Is it a net good or net bad in your mind??

Explanation / Answer

Actually lowering the price is always beneficiary for consumers or customers. But this lowering the price has two implications, one is consumer satisfaction or increase of consumer surplus. Another point is this will reduce the producer surplus or profit of the producer. Due to lower price consumers are making gain and producers are making loss in terms of lowering the profit.

Now if prices reduce then there will increase a certain level of quantity demand. So producer's profit will be less but that demand of that manufacturing good. If firm lay off employees due to lowering the price this is bad for the society. The good side of lowering the price is that consumers are getting manufacturing good at lower price. The bad thing is if the company wants to maintain a certain level of profit it will reduce the cost through layoff the employees. Now local company will be forced to do it because of pressure from Walmart.

This scenario actually leads to the increase of power of Walmart. These companies either will not be able to sustain or will come under the control of Walmart. This lower price actually gain for the short run inspite of lay off employees. But this will be not good for future because gradually after capturing the whole market Walmart will monopolies the whole market. So this situation actually net bad for the society in terms of long term situation though the consumer will gain in short run.

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