-THE BUYERS' MARKET

Will Prices Or Production Be Cut?

AFTER years of effortless selling, a buyers' market has returned in some industries; in others, it is just around the corner. It is a strange kind of buyers' market, coming, as it does, in the midst of what is still a boom economy. For businessmen it raises an important question: When sales drop, should production be cut to bring it in line with sales, or should prices be cut to keep sales up with production?

The problem of price cuts v. production cuts is not a simple, either/or proposition. There are many other ways to counteract falling sales, among them the introduction of new or improved products, harder selling, more advertising, a switch to lower-priced lines. A manufacturer of lipstick cases, for instance, can substitute steel for more expensive brass in his product; a TV-set maker can concentrate on table models; a chemical producer can cut back some products while pushing others.

But when all of these methods have failed to stimulate sales, businessmen in recent months have usually cut production, rather than trim prices in an effort to boost sales. This philosophy is well exemplified by International Harvester Co., which has already felt the pinch of a 7.6% drop in sales. In the last six months, Harvester has trimmed production and laid off 20% of its workers, rather than cut prices. Harvester President John L. McCaffrey feels that, with farm income down and farmers well stocked with machinery, no new buyers would be lured in by a price cut, even one as big as 10%. Instead, McCaffrey's program is "to turn out new farm machines that are so much improved over existing models that a farmer cannot afford not to buy them."

Businessmen put production cuts ahead of price cuts for several important reasons. One of them--and a good one--is that in the supercharged U.S. economy, there are many obsolescent, high-cost plants in operation. As long as they operate, they help keep prices up, dissipate the advantages of efficient plants. The other arguments, that sky-high wage and material costs make price cuts impossible, are not so easily defended. While high wage rates are frozen into the economy, the prices of many materials are already melting, and commodity prices, in general, are more than 5% below their highs of two years ago. Furthermore, as a result of the $73 billion spent on new plants and equipment in the last three years, the productivity of the U.S. industrial machine has increased, counteracting, to some extent, the wage increases.

In the case of industrial giants such as General Motors, price cutting raises special problems. Since G.M. increased its profits to a record level this year, while the profits of such competitors as Chrysler, Studebaker and Hudson were dropping, G.M. might well be able to cut its prices substantially. But G.M., with 46% of the entire auto market already, might thus increase its share to 50% or 55% and drive the independents out of business. Under such circumstances, G.M., already under investigation by the trustbusters for its ties to Du Pont, might face an antitrust suit on charges that it sold too cheaply. (The Great Atlantic & Pacific Tea Co. is now on trial on charges, in effect, that it sold too cheaply, thus drove competitors out of business.)

Actually, while U.S. industry has always been quicker to cut production than prices in times of slump, it has usually followed a directly opposite policy over the long run, on the theory that the lower the price, the wider the market. Auto dealers are once again proving the truth of this maxim. Loaded down with new cars, they have kept sales up by offering big discounts and trade-in allowances. In similar fashion, while many appliance dealers are loaded up with hard goods, the discount houses in the big cities have proved that they can move mountains of appliances by cutting prices--and still make a good profit doing so. In short, unofficial price cutting in some industries has been the reason production has stayed so high.

The chief argument for price cuts before production cuts is that production cuts snowball, i.e., a worker who is laid off must cut his purchases all down the line, thus affecting dozens of industries. On the other hand, a price cut affects only the individual company and possibly its stockholders. However, with corporate profits at close to an all-time high--and the death of the excess-profits tax only six weeks away--many corporations should be able to trim prices without endangering dividends.

The danger is that companies may wait too long. If sales fall off and they cut prices as a last resort, the drop is liable to scare off, rather than lure in the consumer. When prices are falling, he is apt to keep his money in his pocket, in the belief that goods will get still cheaper. On the other hand, if businessmen cut prices at a time when sales are good, they will persuade reluctant consumers to spend. It is one of the best ways to prevent the recession that so many businessmen are worried about.

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