Huge Electronics sells a full range of home entertainment systems. Recently, it has extended its product line into computers. It sells “packages” that are put together by major manufacturers and designed to meet basic consumer needs. The systems are such that the basic package does most things needed by the average user but provides the seller with little markup. It is with the middle- and high-priced lines that Huge makes its money.
The salespeople at Huge work on commission. The incentive scheme is consistent with profit margins, so there is a far greater commission “reward” for selling a higher-priced computer package. Huge does not carry extensive stock in the low price range because of the low profit margin. However, these products are an important part of its advertising campaign, as the low prices get the customers in the door. Huge ensures that its low-price-range computers are priced sufficiently lower than those of its competitors in order to be attractive. Once consumers are in the store, they are encouraged to buy a system that “better meets their needs,” and this pitch often works.
The Competition Bureau has received complaints about Huge’s marketing practices and is now investigating. What is the problem with this marketing strategy? Can Huge defend this practice? How might Huge avoid this problem?