Merry Christmas fine people!
So it is Christmas. How about this year I don’t:
- Make the case for why we should give cash instead of gift.
- Warn about not undertaking time inconsistent behaviour on Christmas day.
Honestly, I used to do the same thing every year.
My way of precommiting to that was to time this post to go up on … Boxing Day! The presents are given, the inappropriate behaviour is done, and now we are ready to go shopping.
But those big sales back when I worked in retail appear to be largely gone. Why?
Why was there a sale?
Back in the day I worked on checkout at the Warehouse, it was great times with great people. So what was the commonly known motivation for Boxing day sales?
It started with overstocking. In the lead up to Christmas a retailer will make a large amount of their profit for the year (specifically based on higher margins), however there is significant uncertainty about what they will sell. As a result, retailers would build up extra stock to make sure they could sell the higher margin products at that time – but that would leave them with stock that just didn’t sell.
As a result, Boxing day was about clearing out that stock – usually at close to cost.
However, then consumers knew there would be a sale on Boxing day. Because they expected a sale, there would be a large number of customers available on the day – in other words, expectations of a good deal leads to consumers being in the location.
As consumers have appeared at the store they have taken on the cost of going to the shops and are looking to shop.
When I was working I very much saw this coming into place as I worked. Suddenly retailers were not just “building up stock” of products that didn’t sell, they would ensure they had extra stock of EVERYTHING to sell on Boxing Day.
With lots of customers available in the shopping area, and a lot of competing firms about, part of the story became about trying to get the customers to come shop at your store – rather than your competitors. As a result, big sales were taking place on popular items in order to get the pool of customers to shop with us!
Where has the sale gone?
So Boxing day is just a day out with lots of advertising nowadays – I hardly ever see a good deal anymore. So what has happened?
This reminds me of models of tacit collusion.
Essentially, high competition had given us a Rotemberg and Soloner style competition for consumers. The “large pie” associated with the huge number of consumers wandering around looking to shop offered a tempting reason to try to undercut competitors – generating a price war.
However, in this style of game there is the possibility for retailers to all improve their profitability by agreeing not to fight. Yes the “reward” for fighting is greater with high demand, but given the prisoner’s dilemma that involves an agreement would make the oligopolistic retailers better off.
And as a result, it appears that is what has happened. Boxing Day sales are not longer the event they used to be.
Will this change?
Tacit collusion is sensitive.
The reduction in Boxing Day sales happened after the recovery from the Global Financial Crisis. In that way, the reward for undercutting your rivals has been lower than it was previously – as consumers may be more averse to spending.
If that is the driver, then one day the sales might be back.
However, it could be that the nature of products have changed. As noted here an increasing number of durable products are being replaced by services. The big Boxing Day sales often involved cheap overstock durable products that were sucking up space. If underlying demand for these has gone away, the Boxing Day sale itself may be gone.
Anyway, I’m off to go shopping – Merry Christmas all you beautiful people, and economists!