I just watched a news clip about how the parent company for Value City Furniture filed for bankruptcy. I've seen plenty of companies file bankruptcy (2008 recession, Dick's Sporting Goods, restaurants during covid years, and now a new string of them). I can't help but wonder how they don't have someone in their finance, accounting, or whatever departments doing cost evaluation analysis.
They keep their prices high, don't make sales, and then go under or file bankruptcy.
It makes me wonder: Do companies not know to lower their prices to draw in more consumers (re: have a profit even if it's a smaller one) rather than face bankruptcy or going out of business altogether?
I'm talking about major corporations- the type that are everywhere and post billion dollar net and gross profits for a decade but then slide into bankruptcy or fold completely. Not one store or small local chains.
Do companies facing bankruptcy lower their prices?
byu/SgtPepper_8324 inAskEconomics
Posted by SgtPepper_8324
1 Comment
>Do companies not know to lower their prices to draw in more consumers (re: have a profit even if it’s a smaller one) rather than face bankruptcy or going out of business altogether?
You’re not understanding what optimal pricing looks like. Any large company will be well aware of this dynamic and will have pricing which reflects their assessment of what is optimal. That is: they find a price which balances maximizing demand *and* profit per item such that they will generate the most profit.
This is why they can’t just do what you’re suggesting: if they reduce the price of their goods and services, they may be able to increase demand, but it will come at the cost of a larger proportion of profit margin such that they will end up losing even more total profit by doing so. For the same reason, they also can’t just raise prices to collect a higher profit margin since they’ll lose enough demand to make the whole process a marginal net loss.
All of this is to say: they’re already maximizing profit with their price points, so increasing or reducing those prices will always lead to less profit.
These large companies facing bankruptcy can’t solve their problems by adjusting prices. Usually, the issue comes from changes in the market that makes them obsolete or very poor decision making from management, etc. Pricing is the easy part at that scale.