I don’t understand the economics of “Black Friday”, so named (apparently) because it’s the day of the year that retailers start turning a profit. Doesn’t the discounting undermine this objective?
- The discounts are only offered to the most price sensitive buyers, screened by their willingness to stand in line outdoors in the cold for a couple of hours waiting for a chance to buy that television for which they would never pay full-sticker. This is known in economics as “price discrimination”, the same process behind, for instance, coupons. But it still requires the retailer to sell the television at a profit, even if it is a much reduced profit. Does the retailer still have a margin after the discounting?
- I would be inclined to think that competition in the age of online shopping would have brought retail profit margins in general down to the “indifference curve” (another econ concept). Yet the discounts offered on Black Friday are below even the internet pricing, sometimes a lot below. This means that the retailers are taking a loss or the economy-wide retail markup is huge for the rest of the year. Neither seems likely.
- Retailers might be counting on shoppers to buy non-discounted items on their visit. Best Buy, for instance, could sell you a TV at a loss and then charge you $80 for the Rocketfish HDMI cable you need to connect it. Wal-Mart might count on shoppers with money burning holes in their pockets to buy full-priced items when they learn that the discounted items were sold to the first four people through the door. If true, it shakes my faith in the financial probity of Black Friday shoppers.
But I don’t actually know the answer. Any ideas?