This morning our national media was filled with news that the American tradition of Black Friday has continued its spread to the UK. Variously people were concerned about crowds (Metro amusingly mocked the polite crowds with a wonderfully British headline), about the effect on our competitive retail sector, or how often deals were the same prices as earlier in the year.
Yet what makes Black Friday interesting for the UK though, is not the immediate impact of price cuts (good for consumers) or the psychology of shoppers looking for bargains (shock). No, what’s interesting about Black Friday is how it shows the benefits of price discrimination.
No doubt your inbox this morning was, like mine, filled with offers from various retailers you’ve bought from before offering you unique deals designed to entice you to part with your cash in return for Christmas presents and goodies. If you got given a discount code, if you got personalised offers, if you received a loyalty bonus then you have been offered goods at a different price to what other people looking at these products will have been. You’ve been offered a discriminated price, a price different to what others will have been offered last week or will be offered next week.
Why do shops do this? The British retail sector is famously competitive with a huge range of specialist and generalist stores in our high streets, in retail parks, and increasingly online. There are huge fixed costs in running stores (not least labour costs, global supply chains and logistics across the UK). Purchasing the distribution warehouses and stores, hiring and training staff, getting a brand known and thought positively about, all of these are high upfront costs that companies incur.
In certain situations you might bemoan price discrimination. Certainly our politicians like to do so when talking about utilities. As Sam Dumitriu argued, the real benefit from price discrimination comes from the overall increase in output, and the lower average price that everyone pays.
Think about a jumper produced by a firm like Zara. The Galician retailer will have spent millions in research and development, in building one of the most advanced supply and distribution networks on the planet and have competitors across the UK offering similar products. The sunk cost is enormous getting to the point where you walk in and decide whether you want to buy a jumper from them or not. If you walked away they haven't earned anything and all that money invested into the stores gets them nothing and it doesn't take long for a high set of costs with falling sales to turn into bankruptcy.
By charging higher amounts to people that are price insensitive throughout the year, and by getting large numbers of people that otherwise walk away during the sales, they can spread the fixed cost that firms are charged. That way they boost the overall level of sales and manage to turn what would be a loss into a small profit.
In other words, they're able to continue getting their clothes out across the country, and you're able to buy a wide range of clothes across the competitive market at a lower price than you otherwise would be.
So here's to Black Friday and the beginning of a very consumer Christmas!