Page 159 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes 2006 started off well enough, but now as we enter the 3rd quarter of the year, some bicycle
brands are reporting overstocks from last season, and retailers are reporting some 2006
models already are out of stock as the brands introduce and start to deliver 2007 models.

History does matter, and in economics, path dependence refers to the way in which
apparently insignificant events and choices can have huge consequences for the development
of a market or an economy. In the case of the specialty bicycle retail channel of trade, the
collective choice not to adopt Uniform Product Codes, or UPC's has come back to blind the
industry again, and again over the last twenty five to thirty years.
The seemingly insignificant, competitive based choice of not adopting UPC's has made
bar coding technology, and the full power of its inventory and sales tracking efficiency
uniformly unavailable across all levels of our channel of trade, making real channel
efficiency impossible. Simply stated - brands and manufactures don't know what is selling
at retail and retailers have little or no input or influence on what is reordered and
manufactured to refill the supply pipeline. As most economists will tell you...where we
have been in the past determines where we are now, and where we can go in the future.
This, in turn, leads to the importance of information.
Economic and channel efficiency is likely to be greatest when information is
comprehensive, accurate, and readily and cheaply available. As evidenced by the specialty
bicycle retail channels recurring pattern of having too much or not enough, many of the
problems facing economies and markets arise from making decisions without all the
information that is needed.
Currently our channel of trade operates on the premise that if a brand or company can
acquire or gather more information than its competitors it is a good thing. However,
economists will tell you that asymmetric information, when one channel player knows
more than the other channel players, can be a serious source of inefficiency and market
failure.
Uncertainty can also impose large economic costs. The power of the Internet has greatly
increased the availability of certain information. However, even with all its information
power, there are specialty bicycle retail channel inefficiencies, like not knowing what is
actually selling at retail, that the Internet will not be able to solve. Accordingly,
uncertainty - literally not knowing, will remain a huge source of specialty bicycle retail
channel inefficiency.
And this inefficiency makes our channels blindness complete. Potentially the most useful
information, about what will happen in the future...or the ability to more accurately
forecast future demand, replenishment, inventory and sales will simply never be available
under our channels current state of perfect competition.

The best example of perfect competition that I have heard recently is in my own
backyard...Madison Wisconsin, one of the best specialty bicycle retail markets in the
country. As most of the industry knows there are two Trek company stores in Madison,
and one of them, located on the East side has been identified as the company's flagship
store. Erik's Bike Shop is a successful multi-store retailer headquartered in the Minneapolis-
St. Paul Minnesota market. Erik's established a store in Madison several seasons ago, and
carries Specialized, as what I understand is its marquee brand.
Several weeks ago, according to the buzz among bicycle dealers, Specialized announced
to its dealers in Madison that Erik's will open a second store, reportedly directly across the
street from the Trek flagship store on the city's East side. By the way, both the Trek
flagship and the new Erik's that will carry Specialized are both in direct competition with
an established bicycle dealer that has carried both the Trek and Specialized brands for
many years - and is just one-mile away!
Contd...

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