The Role of Price Discrimination in Black Friday

Arnold Kling, a high school economics teacher, justifies Black Friday and many other things through price discrimination. He cites this concept as very prevalent and a concept "deserv[ing] a lot more attention".

Temporary sales are a method of price discrimination to collect sales and profits from buyers that normally wouldn't purchase certain items at higher prices. Black Friday is the most important day of the year for these temporary sales. As with almost everything, there are those people that are willing to buy certain products at a price that most would consider high. There is also at least one group of buyers that will only buy those same products at a bargain price.

Sellers must make trade-offs regarding temporary sales. A temporary sale is great because it allows a seller to collect profits from the group of buyers that are "price-sensitive" and only buy at bargain prices. These sales can also sacrifice profits because the "price-insensitive" group that would have paid more can now purchase products for less, reducing profits from this particular group. Kling points out in his article that the great part of Black Friday is that the crowds generally discourage buyers that are "price-insensitive" from taking advantage of bargain prices. The negative externalities from large crowds maximizes profits from both groups, price-sensitive and price-insensitive buyers, to a greater extent than during other temporary sales. It is a big win for retailers that take advantage of this simple form of price discrimination.

To access the article, click here.


Audrey said...

I agree that Black Friday is a great example of Price Discrimination and influences many price-sensitive consumers to purchase, but reading this post got me wondering what my own motivations, as a consumer, were for waking up at 3 am and participating in the madness.:) Were the low prices my only motivation?
Before Friday I had found what I thought to be a few really great deals on items that I happened to need. The price was low enough for me to be willing to brave the nightmare to get them. Although my main reason for participating was a killer deal on barstools, I can definitely say that I was partly influenced by the excitement and thrill of the experience. Having never shopped on Black Friday, I decided I needed the experience at least once. The idea of “Black Friday” got me excited, but ultimately it was the sales that lured me in. Well done stores! Your price discrimination tactics worked…well at least on me!:)

Dr. Tufte said...

ROFL. Arnold Kling is much more than a high school economics teacher: this is the volunteer work he does.

Kling is an MIT Ph.D. (from the same class of 5 graduates as Krugman and another Nobel Prize winner). He is probably the insider economic expert on the housing crisis (he worked for Freddie Mac for a long time). He's also an early internet bazillionaire, because he left Freddie Mac to start one of the earliest online real estate services. Plus he's an author, and co-blogger at EconLog (which is one of the most influential ones out there).

Don't feel bad Audrey! We haven't talked about it in this class, but frequently in ManEc we do discuss the elasticity of novelty. Sometimes the quantities we purchase are influenced by the novelty of the situation. Since humans value novelty, this shouldn't be surprising. I'm not sure how beneficial this trait is, but it makes you very normal.