Question

A clothing store on fashionable Rodeo Drive charges more for the same clothes than another store in less fashionable Compton. Why does the first store charge more? (LO3) a) It has to pay a higher rent. b) It knows its customers can afford to pay more. c) It advertises more. d) Because it can.

Short answer

Option A: The first store charges more because it has to pay a higher rent.

Step-by-step solution

Understanding the context

In this problem, we are comparing two clothing stores. One is located on Rodeo Drive, a fashionable area, and the other is in Compton, a less fashionable area. We need to evaluate each option provided and select the best answer that explains why the first store charges more than the second store. #Phase 2#:

Evaluating Option A

Option A states that the first store charges more because it has to pay a higher rent. It is reasonable to consider that the rent for a store located on Rodeo Drive might be higher than in Compton, given the difference in the neighborhoods' desirability and prestige. This could contribute to the store's higher prices.

Evaluating Option B

Option B states that the first store charges more because it knows its customers can afford to pay more. This may also be true, as Rodeo Drive is known for having wealthy shoppers. However, this reasoning may not be the primary factor affecting the store's pricing strategy.

Evaluating Option C

Option C states that the first store charges more because it advertises more. Advertising costs might affect the store's pricing, but it is not necessarily the main reason for the store's higher prices compared to the store in Compton. Thus, it is not the best answer.

Evaluating Option D

Option D states that the first store charges more "because it can." This answer seems to be an oversimplification of the economic factors affecting the store's prices and does not offer much insight into the underlying reasons.

Selecting the best answer

After evaluating each option, we can conclude thatOption A, "It has to pay a higher rent," is the most reasonable and direct explanation for the first store's higher prices. The higher rent for a prime location on Rodeo Drive would likely contribute to the store's higher operating costs, leading it to charge more for its products.

Key concepts

Supply and Demand

When discussing the fundamentals of economics, 'supply and demand' sits at the very core. The law of supply and demand explains how the price and quantity of goods sold in markets are determined. The price of a product is directly linked to the supply of it, as well as the demand for that product.

For instance, if a new fashion trend takes off and more people want the latest jeans, the demand for these jeans will rise. If the supply doesn't increase to match this rise in demand, the limited jeans become more valuable, and the store can charge a higher price. Conversely, if those jeans go out of style and demand decreases, the price is likely to fall to clear out the stock.

In the Rodeo Drive versus Compton scenario, the supply might be the same—a store in both locations could have the same number of jeans. But the demand, influenced by the wealth and fashion-consciousness of the customer base, will likely be higher on Rodeo Drive, which permits the store to charge a premium.

Market Segmentation

Market segmentation involves dividing a broad target market into subsets of consumers who have common needs, interests, and priorities. It then designs and implements strategies to target them. Essentially, market segmentation helps businesses to be more efficient in terms of time, effort, and money.

Using our clothing store example, the Rodeo Drive store's market segment is different from Compton's. Rodeo Drive caters to a segment that values prestige and luxury, and that is willing to pay more for clothes that symbolize this lifestyle. The Compton store might serve a market segment that is more price-sensitive and values functionality or economy over prestige.

This distinct segmentation justifies different pricing strategies. The Rodeo Drive store uses a premium pricing strategy to match its customers' willingness to pay, while the Compton store may employ a competitive or value-based pricing to appeal to its market segment.

Pricing Strategy

Pricing strategy refers to the method companies use to price their products or services. It takes into account segments, ability to pay, market conditions, competitor actions, trade margins, and input costs, among others. It is a complex aspect of marketing and has significant implications on the success of a product.

For the store on Rodeo Drive, several factors influenced its pricing strategy. The high rent is a direct input cost that the store must cover. Additionally, the store is situated in an area that attracts high-income customers who are less sensitive to price changes. Thus, it can employ a premium pricing strategy, setting prices higher than its Compton counterpart to correspond with the perceived value and the affluence of its customers.

It's important to note that pricing strategies are not solely based on costs but are also a function of marketing objectives, brand positioning, and the overall supply and demand situation. In summary, the Rodeo Drive store's higher pricing reflects a deliberate strategy that capitalizes on a unique market segment's willingness to pay premium prices for goods that signify luxury and exclusiveness.