Black Friday Price Discrimination

    Black Friday is an exciting time for many shoppers.  For many shoppers, they finally have a chance to buy  items they have wanted all year.  In this Bloomberg article, shoppers had a chance to buy a 50” flat screen for $298.  The question then becomes why any retailer would sell so many items at such rock bottom prices.  As a manager of a retail store I can tell you that it is difficult to make a profit on Black Friday. 

    It all comes down to price discrimination.  Because of the craziness that is Black Friday, not all shoppers will even go out.  In the weeks leading up to Black Friday I often hear customers tell me that they are willing to pay a little bit more now, in order to avoid Black Friday.  This gives retailers an opportunity to price discriminate.  As we know, not all shoppers are willing to pay the same price for an item.  Because of this event, John Doe can have a similar TV as Jane Doe, but at a much different price, and both customers will be happy. 

    I personally would not want to camp out over Thanksgiving dinner just to save a few dollars, but I guess that’s why it’s price discrimination.  


Tyler said...

This was a great application of price discrimination. I had never really thought of the sales prices being a form of price discrimination, but it makes a lot of sense now. This article did a good job of explaining this for me. Stores target the price-sensitive customers with drastic sales prices, which causes the more aggressive buyers to flock to the Black Friday sales. The more timid buyers, who also tend to be price-insensitive, will be more likely to stay home to avoid the crowds. The question I have is whether the Black Friday pricing is used more to generate revenues or to liquidate overstocked and outdated inventory items.

Dr. Tufte said...

Dillin: 100/100.

I think this is an excellent post. The whole point of price discrimination is that 1) the price elasticity of demand does fluctuate, and 2) some sellers can take advantage of that.

I would add, in a situation where you can price discriminate, there really is no "normal" price. Prices may be lower on Black Friday, but they are probably appropriate for the customers that day. On some day earlier in the fall when customers are less price elastic, the higher price is appropriate there too, rather than "normal".

I love that Tyler got a lot out of this. I know you folks hate doing the Aplia assignments, but the point is to get you back up to speed so you can understand price discrimination ... which is one of the topics that separates managerial from microeconomics.

I think Tyler's last question is interesting. Dillin, care to divulge any secrets from your operation?

Dr. Tufte said...

Oops: 50/50 for Tyler.

Julia said...
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Julia said...

I disagree that Black Friday is example of price discrimination. To me price discrimination means that change in price happens randomly and nobody can predict it. However, on the Black Friday everybody is aware of it. Also price discrimination happens when people are segregated in the groups , but not in this case.
Retailers are trying to entice consumers into purchasing newer models of the products they currently possess.So they lower the price to sell quickly.However, the customers can return any merchandise with a gift receipt.
I disagree with the idea that it is hard to make a profit on Black Friday. My husband works in the receiving department of Sears, he told me that they made over $200,000 by two o'clock when their goal was 150,000 for the whole day.

Dave Tufte said...

Julia: 47/50.

Hmmm ... Julia, your definition of price discrimination is not the one in the text that you have to learn for class.

Part of the beauty of price discrimination from the manager's perspective is that even thought people may very well be able to predict it, they'll still pay. That's why we study it.

Further, one of the points of Chapter 9, and a subtle point that shows up only in this text, is that the segregation doesn't have to be intentional. It just has to be exploitable. So, in this case, because some people go shopping, and some don't, the segregation is already accomplished.

I'm not sure which Sears your husband works at, but my guess would be that those figures are for revenue not profits. Profit rates over the course of year are under 10% for department stores, and I'd guess they're far lower than that on Black Friday. So, to make that much profit, they might have had to sell several million dollars worth of merchandise before 2 PM. That seems unlikely.

John said...

On a personal note, I am not in favor of using a holiday that brings families together into corporate greed. On another note, Black Friday appears to be good from an economic point of view. The media exposure and the consumer craze for discounted prices brings a mass number of people out with the purpose of saving money on purchasing items. Consumers are able to save money on one item, which allows them to purchase more with their disposable income.
There are some amazing discounts out there, but the main purpose of discounting a few items is to draw in the masses. This is nothing more than a marketing scheme. I would argue that most items are either not discounted or are no more discounted than they are at other times of the year, on other holidays, or other sales events retailers hold throughout the year. My wife and I have been wanting to buy a specific couch and we have pushed it off multiple times for financial reasons. We decided to go check it out on Black Friday. This couch has either been discounted the whole time or is back to the same discount offered 4 months ago. No matter the argument, whomever created Black Friday is a marketing genius.

Dave Tufte said...

John: 50/50

Not much ManEc in this comment.

John, why does marketing work at all (in this case)? I think your "marketing genius" is just practicing good economics.

First off, I think Black Friday takes advantage of an inelastic demand for novelty. If Black Friday was a week long, it wouldn't be as popular.

Secondly, the discounts are letting consumers have a bunch of what would have been producers' surplus as their own. And what do they often do with that? Spend it on other items, so the producer recovers the lost surplus.