Is there any sane reason for Black Friday?

11/29/2013 03:30:00 PM
Actually, I'd pay 20 to 50 percent more if you get rid of the crowds.
Happy Thanksgiving!

Actually, yesterday was thanksgiving, but I didn't do any blogging yesterday. That makes today Black Friday, a shoppers' holiday on which all the stores are packed with people. There are usually many injuries.

Something that I have always wondered about is whether there is any sane reason to shop on black friday. In principle, there are supposed to be all kinds of crazy good deals everywhere. But as an economist, I'm skeptical.

Is there any economic reason to suppose that there are tons of great deals to be had on black friday? I don't see it. For one thing, no producer anywhere has any incentive to lower any of their prices below what they paid for it--it's better not to sell than sell at a loss! Store markups range from 20 percent to 35 percent over wholesale costs, and that has to cover both profits and store operation costs. Thus, if you are looking at a "discount" of more than 30 percent, there's something fishy going on. I can think of only exceptions to this rule:
  1. trying to unload undesirable or damaged products
  2. fishing for customers using a few good deals as bait
These are the only reasons I can think of for a store to sell a product below cost. The first point is the only sane reason for discounts, in my humble opinion. If you can't sell a product, you lower the price. If that discount happens to bring the total price down to below your willingness-to-pay, then it makes sense for you to buy it, and it makes sense that the store would be willing to take a loss because it turns out not to be worth as much as the retailer had predicted it would be worth.

The problem with the first reason is that there is no inherent reason to wait until Black Friday to offer such a discount--you can sell a product at a loss any day of the year. What does change on Black Friday is that there is a huge increase in demand, which means that your probability of selling a product at a given price is much much higher on Black Friday than most other days of the year. Hence, you can probably sell an undesirable or defective product at a higher price on Black Friday than any other day of the year. This is, I think, a satisfying answer to the Black Friday puzzle because it would be individually rational for the retailer to offer such a discount specifically on Black Friday, since the discount is acutally less than what they would normally have to offer, and also rational for shoppers to shop for such discounts on Black Friday, since they know that retailers won't offer it on other days of the year. However, the welfare implications of this are somewhat disturbing: ultimately, this means that the existence of Black Friday makes consumers in the aggregate worse off, since prices are actually higher than they otherwise would be.

The second reason is probably also at least somewhat true. Stores often do offer money-loosing bargains that are designed to generate publicity and bring customers into their store as opposed to their competitors. There's nothing wrong with that, per se, and if you happen to be one of the few who get the bargain while supplies last, good for you. But, let me offer a bit of a warning to bargain hunters: stores would only do this if they expected it to cause people to spend more than they normally would have in their store--be on the lookout not just for discounts, but also price hikes. Essentially, this scheme is one of cross-subsidization where they tease you with a bargain or two, but really aim to overcharge on all the impulse buys. Moreover, remember that stores can and do raise their prices in order to offer discounts.That's not to say that it isn't rational to hunt for good deals on Black Friday, but you should realize that they are counting on behavioral economics leading unsophisticated shoppers to overspend. The final price, not the percentage discount, is the only thing that matters. Ever. Period.

I often hear about a third explanation for Black Friday discounts: price discrimination and customer loyalty. I think most people have an intuitive sense of how offering discounts is a way for retailers to essentially charge one price for people with low price elasticities (ie, inattentive loyal customers) and a lower price for customers with higher price elasticities (bargain-hunting defectors). The formal model I think about here is this one published in the AER. In this model, period sales give rise to implicit price discrimination as retailers are essentially able to charge a regular high price to inattentive people who don't like to shop around, without totally loosing their sales to bargain hunters who will still show up whenever they hold a sale. However, this can't explain Black Friday, because in this model holding a discount is profitable if and only if relatively few retailers are holding discounts. Black Friday cannot arise in this model, because holding a discount while everyone else is having a discount would be a money-loosing venture on the part of retailers, who would therefore decline to participate.