THE CUSTOMER IS KING.(The Talk of the Town)

Over the years, Wal-Mart has been given credit or blame for many things: the productivity boom of the late nineties, the destruction of American downtowns, the migration of jobs to China, the popularity of Toby Keith. Now, according to the financial press, it's responsible for one of the most important mergers in business history, Procter & Gamble's fifty-seven-billion-dollar acquisition of Gillette. As the pundits tell it, the companies did the deal in order to create a manufacturing giant with enough bargaining clout to stand up to Wal-Mart.

The story goes something like this: once upon a time, companies that made things had the whip hand in the American economy. They could charge premium prices for their goods, and raise prices when costs went up, without losing their customers. In other words, they had pricing power. But in recent decades the rise of retailers like Wal-Mart and Target has changed all that. Today, the companies that sell things dictate the terms. The P. & G.-Gillette deal, in this rendering, is an attempt by a pair of manufacturers to take back a little of the power that they've lost.

It's certainly true that manufacturers have a lot less pull in the marketplace than they used to. But they haven't lost it to Wal-Mart and Target. They've lost it to you and me. The real transformation of the past thirty years is the rise not of the American retailer but of the American consumer. That's why Wal-Mart is so tough to negotiate with, and so relentless in its quest for lower prices and lower costs. American consumers now consider it their due to have access to a wide variety of cheap, reliable goods. Their allegiances are fickle; brand loyalty is in fast decline. Wal-Mart is often spoken of as the most powerful company in the world, but it earns less than four cents on every dollar of sales, and its profit margins have stayed roughly the same year after year--which means that when it cuts costs with suppliers it passes along those savings to the customers, instead of padding its own bottom line. Wal-Mart can't charge more; if it does, its customers will go elsewhere. The same is true of Target and Costco. In a sense, Wal-Mart is the elected representative of tens of millions of hard-bargaining shoppers, and, like any representative, it serves only at their pleasure.

Several developments in the past three decades have combined to increase consumer clout. The Federal Reserve's war on inflation got people accustomed to stable prices. Laws changed--until the seventies, it was actually illegal in many states to sell goods for less than the manufacturer's suggested price. A sharp rise in the quality of most products narrowed the difference between big brands and upstarts, and an influx of foreign products dramatically increased competition. Finally, the explosion in information available to shoppers--from Consumer Reports, in the ...