Thursday, November 24, 2011

Turkey Prices


In honor of the US holiday today let's talk turkey. The Financial Times is reporting that US grocers are selling turkeys at a retail price ($0.49/lb) below the grocers wholesale prices ($1.19/lb). Now if price is less than the average variable cost of selling a good/service then economic theory tells us that a firm should not sell the good or service since the loss of selling is greater than the loss of not selling. So why?

On the other hand, if the firm can sell other goods or services (such as stuffing and gravy) along with the "loss-leader", and the profit from the other goods is greater than the loss on the turkey, then this is consistent with profit maximization. In economics we call this cross-subsidization, and this is a tasty example of it.

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