By Karl Smith
by Adam Ozimek
I’ve written about the different theories to explain Black Friday sales before, and how none of the leading theories predict that retailers would want to keep some sales secret. In fact, the loss-leader model, which has the most empirical evidence in its favor, specifically predicts that stores will advertise their deepest discounts to lure shoppers. Thinking and discussing this issue recently, I have a simple theory as to why stores would keep their prices secret, and a new explanation for the allegedly higher price elasticity during the holidays. (I say allegedly higher price elasticity because I have yet to see empirical evidence for this. If anyone knows of any, please send it along.)
The first question is: do stores really want to keep their biggest sales secret? According to Wikipedia, Wal-Mart (NYSE:WMT), Target (NYSE:TGT), Office Max (NYSE:OMX), Big Lots (NYSE:BIG), and Staples (NASDAQ:SPLS) have gone so far as to insist that their Black Friday price lists are copyrighted. They have even used the Digital Millenium Copyright Act to have take-down notices issued to websites posting the sales list. So yes, they very much want to keep their discounts a secret.
Arnold Kling has written before that Black Friday crowds work as a separating mechanism to keep less price sensitive shoppers, to whom they can usually charge a higher price, from taking advantage of the discounts. I think the secret sales also work as a separating mechanism. Since they don’t know what will be discounted, the secret nature of the sales lure in shoppers looking for the cheapest deals on a wide range of goods, not necessarily looking for a specific product. This is good because stores want the buyers of their largest discounted products to be people who wouldn’t have otherwise bought that product. If you announce in advance which products will be discounted, then the buyers who will get the highest return from coming to the store are those that were already planning on buying that product.
For instance, if on Black Friday a store discounts Sony’s 60 inch LCD TV by 30%, anyone who was planning on buying that TV would have a huge incentive to go to that store on Black Friday. Thus the proportion of buyers who would otherwise have bought that TV are high. If they don’t announce the discounts, then you won’t be providing those specific buyers with incentive to come in, and thus the cannibalization rate will be lower.
This brings me to the novel, and seemingly obvious, explanation for the higher price elasticity during the holidays; because you’re buying gifts for someone else you are much more indifferent between products. To someone shopping for a TV for herself, a recliner makes a pretty poor substitute. If she’s looking to spend $800 on a gift for her husband, then they are actually pretty decent substitutes. During the Holidays many more products are good substitutes for each other than they are during other parts of the year. Tell me this, is there any other time during the year other than Christmas when a pair of slippers is a good substitute for a box of cigars?
There’s a whole other discussion to be had about why people are more indifferent between products when buying them as gifts for others, including signalling theories, limited information about preferences, etc. But it seems obviously true enough that I’ll leave it there for now.