New study: pricing law prevents innovation, savingsEditor’s note: Two economists at
Hope College in Holland studied the state’s item pricing law to determine
its effect on retailers and consumers. Their findings have been made available
in this commentary distributed by the Mackinac Center for Public Policy,
a research and educational institute headquartered in Midland. MRA has
long advocated reform of the outdated item pricing law. by Robin Klay, Ph.D. and Because of the 1976 law, Michigan is one
of a few states that still require paper tags on most merchandise. This
is preventing our state’s retailers from utilizing pricing innovations
that employ modern computer systems. The situation could be remedied by
making it legal for Michigan retailers to substitute electronic price
labeling (EPL) systems for paper price tags.
Allowing stores to substitute EPL systems
for labor-intensive, hand-held “price guns” would save on labor
costs, and a bill to accomplish just that has been introduced in the Legislature
by Sen. Joanne Emmons (R-Big Rapids). Those cost savings are likely to
be greatest for grocery stores, given the large number of items they sell
and the frequent need to match checkout prices with changing inventory
costs. The Michigan Consumer Federation has expressed
reservations about EPL systems. It fears that these systems might encourage
grocers to take advantage of consumers with instant price changes of which
they are unaware. However, in states that allow new electronic
labels, consumers express satisfaction. In a survey conducted by Indiana
University, two thirds of customers said that consumer service was better
in stores using ESL systems. The direct advantage to consumers is the
elimination of price differences between the shelves and the checkout
counter, making for greater consumer confidence in the integrity of store
personnel. Such pricing systems could thereby achieve the intent of Michigan’s
1976 item pricing law - protecting consumers from being overcharged -
by ensuring pricing integrity. What if store managers could suddenly change
prices between the time a consumer picked goods off the shelf and the
time he arrived at the checkout counter? Because of this possibility,
ESL systems allow for a two-hour delay in price changes (or overnight
changes), thereby avoiding any unpleasant surprises. Furthermore, ESL
systems enable producers to respond very quickly to competitors’
price changes, bringing cost savings to consumers. With paper tags, stores must wait until they
can lower the price of an item by at least four cents in order to afford
the man-hours needed to make the change. Electronic systems would enable
stores to offer instant “blue light specials” for certain items
or times of the day, for example, when there are few shoppers in the store.
This is the sort of off-peak pricing that vacationers are familiar with
on airline tickets and even hotel rooms. The advantage for buyers is lower
prices in the “off season,” as well as fewer long lines. How large are the potential cost savings
to consumers? Over a period of one year, Knowlan’s Super Markets
in Minnesota spent 1,700 fewer hours making price changes with an ESL
system, saving roughly $13,000. The devices can typically pay for themselves
in about a year. Total savings will rapidly increase as the cost of ESL
devices continues to fall (from $12 per unit in 1997 to a low of $5.50
today). Because the grocery business is highly competitive, with very
low profit margins, cost savings are passed on to consumers. Some critics of changing the 1976 law may
argue that ESL systems reduce available hours of work in Michigan. But
experience over the last four decades has confirmed that while new technology
tends to eliminate some low-skilled jobs, overall it creates more employment.
In the case of grocery stores, for example, while bagging jobs have been
largely eliminated, many new jobs in computer systems have been created
for handing inventories, ordering, marketing, checkout and pricing. Why should consumers in Michigan be denied savings enjoyed by consumers in other states, like New Jersey, and throughout Europe? It is time to bring Michigan up to date with 21st century technologies and fix the 1976 item pricing law. |
An
EPL system shows the price for each item on the shelf where the item is
displayed. Prices can be changed instantaneously with a radio-operated
device, connected to barcode-reading computer checkouts. The 1976 Michigan
law, because it requires individual price tags on items, makes it impossible
for retailers to take advantage of this technology.