Why Ikea Could Shake Up Economics

Retailer’s pricing strategy challenges theory of supply and demand

By Julie Butters | Photo by MATT MORTON/PA WIRE/AP IMAGES

Supply and demand is a core principle of economics: when demand is low, prices drop—and vice versa. But one retail giant is turning that maxim on its head, and its pricing strategy could give economists vital information they can use to help governments regulate businesses and respond to an economy’s ebb and flow.

Marianne Baxter, a professor of economics who specializes in international finance, has found that Ikea’s prices don’t drastically shift with changes in exchange rates or in times of economic instability. Corporate pricing strategies are usually held close, which makes it difficult for governments to predict how economic developments such as recessions and fluctuating exchange rates could affect imports, exports, and consumer spending. “If we don’t understand how companies will react to changing incentives like differing exchange rates,” says Baxter, “we can’t write very good policy for how to regulate companies.”

Baxter’s research partner Anthony Landry (GRS’07), a senior research advisor at the Bank of Canada and faculty member of the Wharton School at the University of Pennsylvania, proposed they use Ikea as a case study. It’s the largest furniture retailer in the world, with stores in dozens of countries, and good data would be easy to find—in Ikea catalogs. There were other benefits to studying a company selling the same products in different countries: Ikea’s catalog prices are in local currency, so they could see if price changes correlated with economic and political events.

The researchers bought old Ikea catalogs from seven countries, mostly through eBay or friends abroad, and oversaw the painstaking process of inputting about 300,000 data points, including product size, color, and cost. They then tracked the company’s products and pricing against major economic changes—such as the introduction of the euro and the Great Recession—from 1988 to 2015.

Preliminary findings show that Ikea’s pricing doesn’t fit the typical model of supply and demand. In the Great Recession of the late 2000s, for example, its prices remained fairly stable despite lower demand. “What seems to be happening is that they just pulled a lot of goods out of circulation,” says Baxter. In the period between the 2008 and 2010 European catalogs, there was a 21 percent drop in the number of available products. Baxter speculates that Ikea ditched poor sellers or products it couldn’t figure out how to make more simply and cheaply.

Baxter and Landry found another surprise: Ikea’s prices didn’t match fluctuations in exchange rates. Accepted economic theory says that if an exchange rate changes, the full resulting increase or decrease in cost gets passed on to the consumer. At Ikea, Baxter discovered that “from one year to the next, they actually don’t change their prices about half the time. If they’re going to decrease the price, they decrease it by an amount that you would actually notice, like 10 percent or 15 percent, and they make a big splashy headline about it. But when they raise the price, they tend not to do it in big steps; they tend to kind of inch it up a little bit at a time”—possibly to discourage customers from foregoing purchases or buying elsewhere. Ikea’s modest price increases also seem to contradict economists’ theory of menu cost, which says companies don’t often change their catalog prices because it’s not cost-efficient to make small price adjustments, such as those under $1.

A grant from BU’s Rafik B. Hariri Institute for Computing and Computational Science & Engineering will speed up ongoing data collection and analysis. Baxter is particularly interested in using image-recognition software to search for cultural differences among Ikea catalogs from various countries, to better understand how it markets its products.