Should Stores Charge Different Prices for Different Size Clothes?

1/17/2013 02:28:00 PM
I recently noticed that the clothing store Express charges the same prices for all different sizes of each clothing item. This led me to wonder if this price uniformity was predicted for in a standard neoclassical microeconomic model. On the one hand, a shirt represents the same value to a large person as it does to a small person, so on the consumer side there is no obvious reason for the prices they are willing to pay to differ--its not like people who need bigger clothing are somehow benefiting more from that clothing than small people. On the other hand, perfect competition says that profits are maximized when the price equals marginal costs. Now, if a large size shirt requires more fabric but the same (or more) labor, then that means that the marginal cost of producing a large shirt is greater than that of a small shirt.
Now lets think about competition. Suppose a firm, like Express, charges the marginal cost of the large shirt as the price for all sizes. This means that a competitor could make the same shirt, but producing only the small and medium sizes, and sell them for a bit less than what Express is charging for them. In perfect competition, that means that (except for some search frictions) all buyers of small and medium shirts should abandon Express and buy the shirt for a little bit less at the competitor. Express can respond by either halting production of small and medium shirts--that is, specializing on large sizes--or by cutting their prices on small and medium shirts as well, which they can do profitably because we have not assumed that their production technology is any different than their competitors'.

This says that even though the small and large shirt are of equal value to consumers, we should still see differing prices due to the differences in production costs. Now, you can argue that clothing stores aren't examples of perfect competition--the shirts made by competitors will inevitably differ from those made by Express in ways that consumers care about, so that each store is selling clothing that is largely substitutable, but slightly different. This is monopolistic competition. We have some decent models of this kind of monopolistic competition, and it turns out that this distinction changes very little--profit maximizing firms will charge a markup over marginal costs, but that markup is a constant. That means that even with monopolistic competition we should see different prices for different sizes.

So why is it that Express can get away with charging the same price for all sizes?

One possibility is that Express is not maximizing profits along this dimension. In perfect competition, this means that Express would be driven out of the market for at least some sizes. But in monopolistic competition, firm profits are positive, meaning that Express might be able to set its prices for the medium and large equal to its price for the small, and still earn a positive amount of profits overall. This is not profit maximizing, since they could have charged more to the medium and large size people--who presumably are unable to substitute for smaller clothes.

Another possibility is that perhaps there are frictions I have not considered. I have no idea how much extra cloth it takes to make a large shirt than a small, but it is possible that this is quite small, so that fictions associated with keeping different prices--such as producing extra bar codes and labels for the products--are actually larger than the cost of the additional cloth. Or maybe it actually doesn't take more cloth to make a large size than a small--there is a fair amount of waste cloth in the production of any garment, and it may well be the case that in the most efficient method of production the only difference between a large and small is the amount of waste. In that case, marginal cost is not affected by size.

Another, less likely, possibility is that elasticities of demand differ between buyers of large and small clothing. This is unlikely in the sense that it would be an extraordinary coincidence if the elasticities happened to exactly counteract the effect of differing marginal costs. But the premise is quite reasonable--buyers of large shirts are always buyers of large shirts, so that if large shirts cost more than small shirts, this makes the large person poorer than the small person, and therefore more price elastic, which would in turn place downward pressure on the prices of large shirts relative to small ones.

One final hypothesis, which is the one I hear most often when I pose this question (I will pose it in a slightly more technical manner than I usually hear it): maybe that form of price discrimination imposes non-market costs on firms. What I mean by this is that consumers might find that form of price discrimination distasteful and choose not to shop at stores that do it. This is a non-market force in the sense that it requires collective action that is coordinated by some means other than the price system itself--mechanisms such as social norms and cultural values, for example.
Ellie K 1/22/2013 11:30:00 AM
Matthew, I think there is are some flaws in your understanding of the structural model of the retail clothing marketplace.

Many clothing stores, including The Limited, have a line of Regular sizes (Missy) for women's clothing, and one or more of the following:
Junior - for 13 thru 19 year old's approximately, that vary in size and style from regular
Petite - for adult women under 5'4" in height,
Women's - for adult women who are heavier or thicker-stockier, and occasionally
Petite Women's - short and heavy, as well as
Tall - for adult women over 5'10" or so.

All these lines are priced slightly higher than Regular (Missy) sizes. It doesn't depend on whether more or less fabric is used. They are specialty garments, even though sold side-by-side with regular sizes. Why do stores do this? Many possibilities... We don't know if it is merely profit seeking (which customers gladly pay, I will tell you), or because there are extra costs incurred in making non-standard sizes and offering so many choices.

Second point, regarding only regular sizes, which is what you referred to. Consider the extra costs such as price strategy and more complicated transactions processing, if sizes were priced differently. Would it be worthwhile? (Also, all people might try to buy small sizes, and thus be less overweight, so smaller sizes would fit. Of course, that wouldn't help tall people!) It is difficult to determine what the stronger influence is, in the absence of data.

If we knew production costs, and had transaction data for both scenarios (same price versus different price, by size), we could assess whether the pricing model was driven by economic cost or reaction to customer behavior. Now that is something I am curious about!
Anonymous 12/11/2013 05:39:00 PM
I feel they price should stay the same for all sizes!! If things start to change now people will look else where.. And they will feel unhappy with the services. Why charge one cheaper than the other? To me thats being unfair and not everyone is skinny. Loads of girls have big hips and smaller legs so they have to go up and size or to. Its not the peoples fault. I disagree with this and think all should be equal!
Anonymous 1/10/2015 03:41:00 PM
The sizes should be different. When they are the same, the people who buy small sizes are subsidizing the cost of clothing for fat people. No wonder there is an obesity epidemic.