Sunday, 27 December 2009

The why of Boxing Day sales

For those of you who have been taking advantage of the Boxing Day Sales here is a question, Why do we see post-Christmas sales? Why are the sales right after Christmas and why do they happen every year?

There are a number of possible reasons. To get rid of all the unwanted merchandise is one, while to reduce inventories for tax purposes, is another. May be post-Christmas sales are a consequence of store buyers' misjudgements about the market demands for various goods and thus come down to mistakes in ordering.

But if such sales happen year after year after year can it really be chalked up solely to misjudgements and errors. If post-Christmas sales can be chalked up to misjudgments and mistakes, then you have to ask, Why are the store buyers at these stores retained, year after year after year? Shouldn't they be fired and replaced with buyers whose misjudgements and errors aren't as pervasive and persistent? After all, we are looking at stocking "mistakes" at Christmas that are systematic, that extend to all departments in the stores and result in "excess inventories" that are discounted by 50% or more. Also if stores have "excess inventories" why not sell them off at full price slowly over the next year, and order less next Christmas.

There must be a better explanation. And there is, price discrimination. This amount to saying that retail stores have post-Christmas sales (often deep ones) because the price-insensitivity of their customers takes a plunge between the day before Christmas and the day after. McKenzie (2008: 71) puts it this way,
Before Christmas, many customers need the goods they buy to be able to stand witness to the considerable (often only imagined) joy of their love ones and friends on Christmas morning receiving their gifts. Before Christmas, many customers are working and have high opportunity costs of their time; they also might have low storage costs. They have not yet filled their cabinets and closets with countless gifts, most wanted but some kept only out of respect for the givers. After Christmas, many buyers are often fully stocked with more goods than they need, or want. Many are often on holiday breaks at Christmas time, with low opportunity time costs.

More to the point, before Christmas, buyers' demands are highly inelastic. After Christmas, they are highly elastic because they have time to consider more carefully the prices charged by any number of sellers, and they have to see significant price reductions to stuff their cabinets and closets with more products. [...] firms can maximize profits only by playing to the different elasticities of demand, which means that they should charge relatively higher prices before Christmas in anticipation of charging relatively lower prices afterwards.
Stores order earlier in the year, and they order with both markets in mine. That is, they order with both the pre-Christmas and post-Christmas buyers in mind. What is tell us is that post-Christmas sales are planned for, they are not the result of mistakes. McKenzie again,
The higher before-Christmas prices fit the higher demand and lower price elasticities of demand that stores then face. The after-Christmas prices fit the then lower demand and higher price elasticities of demand. Christmas allows stores to segment their markets with the prices charged before Christmas being higher than it would be if a constant price for both market segments had to be charged. (McKenzie 2008: 72)
McKenzie goes on to note
Of course, the elevated before-Christmas prices, followed by expected after-Christmas sales, can cause many price-sensitive shoppers to postpone as many purchases as they can until after Christmas. But such postponements are not necessarily all bad for stores, since the postponements further segment their markets into price-insensitive and price-sensitive shoppers. Purchase postponements can leave the before-Christmas market dominated by highly price-insensitive customers, giving rise to some additional price increase tailored to the demands of the before-Christmas shoppers. Shoppers who delay their purchases can increase the after-Christmas demands for goods, thus tempering the extent of the after-Christmas price cuts. (McKenzie 2008: 72)
So post-Christmas sales are just a way for retailers to get you to reveal your price sensitivity, and then charge you accordingly.
  • McKenzie, Richard B. (2008). Why Popcorn Costs So Much at the Movies: And Other Pricing Puzzles. New York: Copernicus Books.

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