So I work at Old Navy and I have for almost three years now...And one think I have noticed that demonstartes how a market can set a price is when we clearnace merchandise to get it out of the way for new stuff.
I don't know if anyone here shops there ever, but I am there thirty hours a week and recently we had these ugly tunic type tank top...things that were diagnolly stripped, had bows on the straps and were just ugly. They were priced at $12.50 and spent most of their shelf like on promotion for $10. They didn't sell. They were picked through because of the sale sign and I often had to straighten out the rack, but they didn't sell despite tunics being (for a reason beyond me) very in style.
FINALLY they were clearanced to $8.99 and suddenly they were selling! So corporate found equilibrium. Despite customers being willing to look at them, the shirts weren't worth even ten dollars, but minus, $1.01 and suddenly we had a deal!
Although they were willing to buy them, customers did in face have an IDEA of a price they were unwilling to pay as well as one they would. I guess essentially this just backs up a point made in the previous post. Corporate finally had to relinquish some profit in order to create space in the stores and get rid of unwanted merchandise (the fun term we use is Mark 2 Move). I guess consumers really do have more power then sometimes it may seem as big business gets all the tax breaks and prices increase. They key is to hold out and think in terms of needs and wants so that we aren't forced to pourchase at above the equilibrium price just to get an ugly tank top...
I think this can be seen as an interesting commentary on consumer preferences, elasticity of demand and possibly even substitution or complementary effects. Obviously, when the price dropped enough, quantity demanded for the "ugly tunic" rose. Now the demand function for these items could be considered very elastic since as you describe it took an almost 20% price discount to sell the items. This would make elasticity well above one. But, I think the substitution effect has a great deal to play in this situation as well. Many shoppers have a mind to what their budget constraint is when they go to make a purchase, so they must make choices between goods based on their limited resources. The price change in this product increases the attractiveness of the good as a substitute for others. So the customers who bought this tunic after the price change simply could have been reacting to the substitution effect. If this is the case, it is possible that Old Navy simply diverted revenue from the sale of more costly items to this cheaper substitute and would have been better off in trying to get rid of the tunics in a non-price way. Then again, the lower price might have captured a segment of clothing purchasers that would not have purchased anything at all unless this price cut occurred.
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