Market Transparency, Inefficiency and Limitations...

I'm what the foto industry calls "advanced amateur", which means that a) I've got some money and b) I actually bother to read manuals. I used to have my own darkroom, still own a rather expensive Pentax 67 system, and have gone through a couple of digital cameras trying to figure out which one I really want and can justify spending a chunk of money on.

One of the premier makers, of course, is Nikon. Now, Nikon lost me as a customer by insisting that I cough up money for something that was their fault, but I think I'm objective enough not to be snarky about them. I've used their cameras in the past, and they are excellent: you don't get to their status by building junk (of course, the camera I bought my daughter for Christmas from Nikon a few years ago doesn't work either, but that's another story. Their Pro stuff is top-notch).

Now, the web makes markets transparent: you can be in Germany and find out what something costs in the US, for instance, very simply, and you can quickly find all sorts of objective and subjective reviews across the board for virtually any item you want to buy. That's a good thing, informs the consumer, and an informed consumer is the economist's best friend, since they tend to make rational decisions. That's why manufacturers aren't too keen on them, usually, since rational thought and advertising expenditures usually show a negative correlation.

Nikon has a new model out, the D3. Lovely camera, people who have them rave about them.

But let's look at list prices.

In the US: $4999

In the UK: 3399 Pounds Sterling

In the EU: €5180

That gives me...a dollar exchange rate of just a tad less than $1.04 for 1 €, roughly 68 pence gets you one dollar, and the pound is worth roughly €1.52.

And this resembles current exchange rates of ... roughly $1.60 per €, around 50 pence gets you a dollar, and the Pound is ca €1.26.

So, either Nikon is deliberately pricing low in the US, or it is making money hand and foot in the UK and within the EU.

The real story is that it is doing both.

Nikon has a leverage that distorts the true market. If the market were completely efficient, then no one would buy a camera in Europe: they'd buy one in the US, paying more than €2000 less or a discount of no less than 37%.

Now, normally the camera would also be discounted, but in this case - new and desireable - there are little or no discounts available (even online at the best NYC camera stores, B+H and Adorama), but even so: a 37% discount.

Normally, no one would buy their camera in the UK or London.


Unfortunately for the consumer, Nikon can distort its market. The usual justification is that the cost of doing business in Europe is higher, and I will give them that: but 37%? Okay, you do have your VAT driving prices up for the consumer as well, and let's drop 20% of the price right there: that still leaves us with a 17% difference.

It is not 17% more expensive to operate in Europe than it is in the US - remember, we have already factored out VAT - and the question then arises: how does Nikon get away with this?

It's simple: consumer preferences and market fragmentation.

While I'd be comfortable dropping that much money online and having it sent to me, there are plenty of consumers who prefer to go to camera stores and buy brick-and-mortar. Given that photography is both a relatively expensive and a relatively technical hobby, many prefer to have a good working relationship with such a store to get advice, and are willing to pay for it in the form of paying retail. That's fine, that would probabyl explain most of the voluntary decision to go with a high-cost retail channel purchase.

But the rest are screwed: Nikon - and this is nothing unique among international manufacturers - has successfully fragmented what should be a monolithic market. How do they do this?

By controlling the retail channels, via delivery of product and by guarantee limitations. Again, this is nothing new: what is new is that it is now easily visible and that the web allows us to see it in action.

Nikon - and others - control their retail channels very carefully: while they have high-volume discounters who move lots of equipment, their "true" customers, the high-value customers, are the classic photo-shop retail outlets, largely privately owned, with a couple of larger operations that may have shops in a dozen cities or less. This is where folks pay retail and where the highest profit margins are found: if anything, this retail channel is, for Nikon, more profitable than discount channels, despite the larger volume of business.

Delivery is, of course, critical to the retailers: if you don't have the equipment to sell, you can't sell it. Manufacturers police, as it were, these channels to prevent price competition: drop prices too much and you will no longer receive deliveries, and Nikon may refuse to sell to you at all. This is what stops major sales outlets in the US, for instance, in selling more than a handful of cameras to Europeans; if they were to undermine Nikon's price politics in the EU, they'd no longer have equipment to sell. At the prices we're talking about, it would behoove someone wanting to spend that much money to get on a plane, fly to New York, buy the camera, bring it back, pay duty, and they'd still be less expensive than buying it from the corner camera store.

How does Nikon deal with these folks? Simple: warranties. Buy the camera in New York, and you'll have to send it to the US to have work done on it. For a disposable item, not a problem, but for a $5000 camera? Too much risk.


So, I'll end here: you've seen how markets can be transparent, how they can become inefficient for consumers (but very efficient for sellers), and there are always limitations to markets that reflect unique structures and developments.


And I use Olympus equipment, have done so since 1973.