Black Friday is getting more annoying every year. With the mailboxes getting filled with spam messages of discounts. Why is that happening? That happens because individually motivated firms try to compete with each other to sell almost the same products with a little difference.
When suppliers are all selling a unique product, with unique qualifications, let’s say a certain grade of wheat, the only parameter which gauges the market is price, price goes up or down as per changes in supply or demand. However, shirts, home appliances and many other goods are not identical. Each product has its own characteristic which makes it different from other products.
Consider a consumer who wants to buy a blender. Bob can’t decide between the Vitamix 5200, the “top pick” on Wirecutter, which costs $450, and the Cleanblend Blender, which is the less expensive runner-up model that costs about $170. He would be willing to spend an additional $200 for the Vitamix, which he likes. Then, in late October, a tiny store emails him to sell the Cleanblend for only $120. He is aware that the Vitamix will shortly be on sale, but he is unsure of the extent of the discount and the possibility that the other merchant may have run out of Cleanblends by then. He chooses to buy something. He regrets it when, two weeks later, he discovers the Vitamix has been slashed to just $300 while making a morning smoothie in his Cleanblend.
Under these circumstances, sellers have the interest to offer discounts sooner than the other suppliers. This way they might be able to attract more consumers than others. The equilibrium is to offer it before others. It should not be surprising for you that in a couple of years you will receive black Friday offers in the summer.
This phenomenon, which economists call “unravelling”, is common in “matching markets”, such as job markets for doctors and lawyers. The Nobel prize winner, Alvin Roth has mentioned this problem in his book “Who gets what and why?” Although judges in the most prestigious courts were more than happy to wait to see who was the most talented student at Harvard University before offering them a clerkship, there was a strong incentive for judges in slightly less prestigious courts to make earlier offers to students who with high probability were among the top ranked graduates. This compelled the other courts to reply in the same way and offer clerkship to future judges in advance. As a result, offers appeared earlier and earlier. When it comes to clerkships, courts have been able to create standards on how offers should be made, which has helped to decrease the severity of the problem. Unfortunately, such a solution is not feasible for retailers—grouping together to discuss how best to sell items would be sensibly frowned upon by competition regulators.
Source: Economist
