Americans Lose Their Taste for Cereal, Soda and Soap

This article in the WSJ reports that the use of price discounts has increased and describes possible reasons why. (Conduct a Google search on the title if the article does not load properly.) It is a good introduction to supply and demand. The discussion of price wars might be a good introduction to game theory. Finally, the report that increases in the prices of energy and education are driving down the prices of consumers goods might be a good introduction to monetary policy and inflation, particularly the view that higher oil prices result in inflation only if the Fed monetizes them.

SUMMARY: Makers of consumer staples are resorting to aggressive discounts to overcome an unexpectedly persistent problem: Their industry is barely growing. The article offers a reason for the lack of growth. "Many segments are affected by changing preferences, habits and spending priorities.... The problem for makers of household basics is that consumers are devoting a shrinking share of their wallets to packaged goods as other costs of living rise more sharply, such as health care and education." The article also suggests that product discounting is the result of the stagnant or decreasing demand. "Discounts are in the standard tool kit for consumer-products makers. Still, the current level of activity is particularly high. All told, some 33.7% of consumer packaged goods-from soda and razors to shampoo, shaving cream and paper towels-were sold on promotion in the 12 months through February 2014, according to data from Nielsen." Commenting on the possibility of price wars, "They are the easiest things to start, and the hardest to finish."

CLASSROOM APPLICATION: Students can evaluate the cause of the decreases in demands for consumer products, which presumably is a change in preferences, and the result of the shifts in demands. The short-term consequence is lower prices. Instructors can also ask students to conjecture about long-term price changes.

QUESTIONS: 
1. (Introductory) What factors have caused the decreases in the demands for consumer staples? Discuss preferences, technological change, and the prices of related products.

2. (Advanced) Why are manufacturers and retailers wary of offering frequent discounts on products? What factors in the markets for consumer staples are causing frequent discounting?

3. (Advanced) What is a "price war"? Why are price wars easy to start and hard to finish? What factors in the markets for consumer staples could prompt price wars?