Sunday, 25 March 2018

Market power, mark-ups and school uniforms

Late last year, I posted about school uniform monopolies:
With school uniforms, there are few substitutes. If your child is going to School A, you need the appropriate uniform for School A. This gives the school considerable market power (the ability for the seller to set a price above the marginal cost of the uniform). Since most schools are not uniform producers or sellers themselves, they instead transfer that market power to a uniform provider. Usually this takes the form of an exclusive deal with the uniform provider, where that provider is the only one that can sell the school's uniforms, and in exchange the school receives some share of the profits. This creates a monopoly seller of the uniforms, and the monopoly maximises its uniform profits by raising the price. The result is that parents must pay higher prices for uniforms, which must be purchased from the exclusive uniform provider.
It seems opportune that the cost of school uniforms is back in the news this week, given that my ECONS101 class will be talking about price elasticities and mark-ups this week:
A Kiwi social media personality best known for his videos about hunting and fishing has created a flurry on Facebook after taking a stab at the price of school uniforms.
Josh James, better known as Josh James Kiwi Bushman, posted a video on Wednesday afternoon which expressed his shock at the cost of his son's school uniform...
"It's bloody ridiculous," he said. "$14 for a pair of socks, and how much is it for a jersey? Holy crap $40 and $53.99 for a basic, cheap fleece jersey.
"Somebody is making a killing on this. I don't know who is making the money but someone is making an absolute killing making school jerseys. What a rip off," he said...
"I think it is ludicrous. They are selling basic fleece jerseys for $53 which can be made for cheap as chips, in NZ or China, where they bulk buy them from.
"Yet several aisles away there were other fleece jerseys, that were a different colour than the school uniform ones, for cheaper - around $9 to $15."...
James said he felt school uniform companies were marking up prices on purpose.
"They are marking the prices up and taking away all items that are similar - that people could buy for cheaper - so they have to buy the ones that are marked up.
"The kids are not allowed to wear any other clothes apart from their school uniform, and they get told off and sent home if they do. I understand the whole uniform thing, that it is conformity and kids don't bicker and fight, but I think the price is ludicrous.
"We ended up paying in excess of $350 just for one child's uniform." 
Of course the firms are marking up prices on purpose (they would hardly do so accidentally). As my earlier post quoted above notes, this is a story about market power, and when schools give a single seller the rights to sell uniform items that creates a great deal of market power. Firms with market power can raise the price above their costs - the difference between price and cost is their mark-up. The size of the mark-up depends on the price elasticity of demand, which in turn depends on a number of factors, one of which is the number of available close substitutes for the good. In the case of school uniforms, they are mandated to be a certain colour (and often mandated to have the school crest or logo printed or embossed on them). There are few substitutes for clothing of the right colour and type, and this makes demand more inelastic. Inelastic demand means that when price goes up, the quantity demanded changes only a little, in this case because parents can't easily buy substitute clothing. Inelastic demand also allows the firms selling the uniforms to charge a higher mark-up and make greater profits.

The response from the Warehouse chief executive Pejman Okhovat was hilarious:
"The cost is derived from a number of factors - including ensuring that the uniforms are good quality fabric designed to last, as well as the not insignificant cost of customising the uniform as per each school's specific requirements.
"Also when you consider their longevity they offer very good value over time."
There is zero chance that the difference in price between the school uniform items priced at $53 (to take the value from the story) and similar non-uniform items priced at $9 to $15 is due to cost differences. This is purely a story about market power.

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