Friday, November 26

Black Friday doesn't make sense

Black Friday, which occurs today, is an annual event where U.S. retailers have big sales to kick off the Christmas shopping season. But it doesn't make any sense to me from an economics perspective.

The question bugging me (which I don't have an answer to, but perhaps a reader does) is why, if the deals are so good on Black Friday, do stores not offer them on other days? Presumably, retail sales must be dismal leading up to Black Friday — why buy something the preceding Thursday when you know you can get a much better deal the next day? Stores, realizing this fact, should presumably offer their Black Friday bargains before Black Friday in order to get customers into their store. Yet this doesn't seem to happen.

Similarly, the economic principle of arbitrage suggests that prices shouldn't go up after Black Friday; if they did, people would scoop up bargains on Black Friday, then resell them the next day (on eBay, for example) for more than what they paid on Black Friday and less than the retail price. Since in theory everyone would buy the cheaper online product and not the more expensive retail product, stores would have to lower their prices to Black Friday levels to compete.

The only possible explanation I can think of to explain Black Friday — that both businesses' and consumers' valuation of products somehow changes for one day — seems completely unrealistic. Halloween candy goes on sale after Halloween, for example, since everyone values it less on November 1; there is a cost to stores for storing the product until the next Halloween, and consumers don't have as much use for small candies without trick-or-treaters coming by. But I don't think this explanation applies to Black Friday.

So why does Black Friday exist when economic theory says it shouldn't?