Can low prices actually be a bad thing?

Two weeks ago, Oprah announced that KFC would be giving away a free meal of their new Kentucky Grilled Chicken to everyone in America who wanted it. As you are probably aware, the promotion was a logistical nightmare. Their coupon delivery system was not working well, people were making copies of what they found off of the web, and it led to many people having their coupons denied — and rightly so, since KFC could not prevent people from using multiple coupons and eating free chicken for a month. They eventually changed to a smarter solution, whereby individuals go to their local KFC and fill out a form so that a coupon is mailed to them, preventing people from receiving more than one coupon.

But even when the coupons were being honored initially, many people were upset at the outcome. At many KFCs around the nation, they were sold out of chicken before dinner time. Angry customers flooded the web site, and it actually made quite a few news stories: “America shocked that free chicken offer results in stores running out of chicken!” KFC said they were overwhelmed by the response to their promotion. We are in a recession and KFC offers people free food, and advertise it on Oprah. This should have been a no-brainer. And customers were mad that KFC didn’t have enough chicken and that they had to wait in line. Apparently they thought there was such a thing as a free lunch.

Prices ration goods in a market. It seems like a no-brainer to say that low prices benefit consumers, but this example illustrates that that’s not entirely true. Sure, if you’re only looking at the price of a product, lower prices must be better for consumers. But when you consider the availability of a product, and the inconvenience caused by not being able to buy a product you expect to be available, low prices can be bad for many consumers. You have to wait in line to ensure that you get the product, which costs time; and if you don’t, you may be left out entirely. When states have price-gouging laws that prevent people from bringing in supplies of needed goods to an area, you might not really be helping consumers at all by “protecting them” from high prices.

When I was in St. Louis for grad school, Dominos Pizza ran a promotion for a few years: for every touchdown scored by the Rams on Sunday, you would get $1 off any pizza on the following Monday. One day Kurt Warner and Marshall Faulk ran up seven touchdowns, so every pizza was $7 off the next day. At dinner time, I tried calling my Dominos to place an order but they left the phone off the hook. I quickly learned that every Dominos in St. Louis left the phone off the hook on Mondays. You had to go to the store to place an order. They did not institute any policy on limiting the number of pizzas one could buy (or if they did it was at a dozen pizzas), so people were stocking up buying a dozen pizzas at a time. Small pizzas that cost $7, so they were basically free. You had to wait at least an hour to get your pizza made, and by 8:00pm, they ran out. Considering the hassle of driving to Dominos, waiting in a line just to place an order, either waiting there or driving home and back again to pick up the pizza an hour later, for one person ordering one pizza it’s probably a stupid thing to do. Those geniuses that got a dozen pizzas for their family and their neighbors were smart. And they ruined it for everybody else who just wanted to celebrate a Rams victory with a cheap pizza. You might say prices were too low.

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Another great but unrelated economics example comes from Oprah’s show 13 years ago when, after airing a piece about mad cow disease (which had never actually been seen in the U.S., despite being present in the U.K.), she said on her show that she would never eat another hamburger again. It’s a wonderful lesson in the impact of expectations on a market. Oprah says she won’t eat beef any more, and millions of women watch her show — the same women who probably are in charge of putting food on the dinner table. Cattle ranchers expect a significant drop in demand for hamburger meat, which will cause lower prices for their product in the future. They try to get ahead of this and start slaughtering their cows early to sell while the price is still high. This flood of supply causes prices to plummet and they end up losing money. Then they have the cajones to sue Oprah for what she said. (Note: had they not overreacted and instead just countered her show with a little better information for consumers, they probably could have avoided the entire mess.) Oprah won the case, and in the process met Dr. Phil. And now everybody knows that no matter how flat you try to make a pancake, it always has two sides.