IKEA: Challenging The Economic Norm

The iconic Swedish company IKEA is known for their meatballs and their wide selection of home-furniture. Their vision is to create a better everyday life for people — hence, IKEA is a one-stop shop for everything you need in a home. But there is more to the company than its big box stores; their principles and business model have shaken up the well-known supply and demand model, the basis of all economic theory, by crossing boundaries and defying economic norms. 

Collaborative research by Marianne Baxter of Boston University and Anthony Landry of University of Pennsylvania attests to this by meticulously inputting around 300,000 data points of product size, color, and cost. They then tracked IKEA’s products and pricing against major economic changes (such as the introduction of the Euro and the Great Recession) from 1988 to 2015. Additionally, they analyzed the contradiction of IKEA against economic concepts such as exchange-rate pass-through and the law of one price. 

Their initial findings conveyed that IKEA’s pricing does not adhere to general rules of supply and demand. For example, their prices remained fairly stable despite the decline in demand during the Great Recession in 2007. Baxter points out that their strategy was to pull goods out of circulation. In a basic economic sense, a firm’s objective is to maximize profits. However, IKEA again defies the status quo with their Poäng chair. This product resembles the chairs crafted by prominent Finnish designer, Alvar Aalto, whose chairs can sell up to nearly $4000. Instead of riding on this opportunity, IKEA sells their Poäng chair for a mere $129. Baxter analyses Poäng’s price trends and captures a peak price of the Aalto in the 1990s as it then generally declines until 2015. These seemingly counterproductive methods have been built on IKEA’s principle that if the company cannot keep producing a product at a low price even with adequate demand to justify the price, it will discontinue the product entirely. Their catalog represents a constant game of survival of the fittest furniture, wherein expensive products that are redesigned at lower cost and the original pricier models are discontinued. 

Behind this enigma lies a Swedish philosophy. Swedes value socialism and humanism, which is seen when IKEA removes high cost products, offers more than just furniture, and provides customers the best prices possible. For the Poäng chair, costs were reduced when  the material changed from steel to wood, enabling a convenient flat packaging. Baxter quotes that, “economies of scale really kicked in for that chair,” as IKEA was cost effective enough to keep Poäng in their catalog. 

However, cheap furniture comes at a cost. Alexandra Kirkman from Grist suggests that IKEA may be too ambitious with its goals of juggling to design more furniture, to enter more markets, and to build new big box stores all while trying to reduce more greenhouse emissions. IKEA has emitted 24.9 million tons of carbon dioxide in 2019, which accounted for 0.1% of the world’s greenhouse gas emissions. This is due to the use of materials to create furniture followed by the use of IKEA’s products in homes. Moreover, it is also important to know where the materials are sourced from. According to a non-profit environmental group, IKEA may be selling furniture made from wood linked to illegal logging in Russia. The illegally sourced wood has also been said to have ended up in IKEA’s other products. 

IKEA is sui generis: in a class by itself. The company navigates through uncharted economic waters by purposefully going against the basic principles of economic theory. Despite this, their business model seems to be prosperous and favourable to the firm. Overall, IKEA isn’t just an affordable furniture store with picture-filled, wordless instructions; it’s built on philosophy and principles that have driven them to their rising success today.