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On days like Black Friday, everyone rushes out expecting huge savings on everything they buy. The level of demand seems to reach ludicrous levels, and one would expect smart merchants to react by increasing all of their prices in response to demand.

Yet year after year we see videos of people beating each other up and trampling each other on Black Friday in a display of seemingly mindless consumerism.

Is Black Friday really just a marketing ploy that creates the illusion of savings where really none exist? Has the market just not caught up with consumer behavior? Or is there another mechanism driving Black Friday?

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    $\begingroup$ I'm not sure it's an answer in itself, but Loss Leader is certainly a relevant concept. The "door buster" deals are probably sold at cost or even at a loss to get people in the store. Once there, many of the other "advertised deals" may not be that great, if on sale at all. $\endgroup$ – JPhi1618 Dec 2 '15 at 15:19
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    $\begingroup$ Most answers seem to miss that the big savings items usually have a low limit. So there may be 100 people who want the $300 50" 4k TV but only 4 people will actually get one. The store hopes the others people will buy something else. They use the sale price to attract shoppers but use a limit so they don't lose money. $\endgroup$ – Hannover Fist Dec 2 '15 at 17:53
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    $\begingroup$ @Bizorke Do not forget to pick a best answer as a courtesy to all the people who took time to answer (By all means, it does not have to be me!) $\endgroup$ – Kitsune Cavalry Dec 4 '15 at 2:37
  • $\begingroup$ @KitsuneCavalry Since there's been a lot of activity here I'm just giving it a bit of time. I'll pick an answer shortly though. $\endgroup$ – JSideris Dec 4 '15 at 3:10
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Though the Black Friday savings do exist, they are less significant than in some of the early years when the "Black Friday" sales were just starting to get really popular. Raising prices is one way that merchants could try to respond, but then they might exclude the deal-seekers whom they are targeting.

Instead, merchants have been doing other things. This includes selling lower quality merchandise, including a lot of Refurbished equipment. (I'm mainly thinking of websites selling computer equipment. A lot of deals this year was refurbished stuff.) This year, I read (somewhere) that manufacturers have been making specific models of some stuff, which is designed to be cheaper, in anticipation that these models will become Black Friday sales and sell out.

Stores can benefit from increased traffic, including selling add-ons (like overpriced USB cables needed to make wired printers work), and having lots of staff members but still having a high customer-to-staff ratio just due to the sheer large number of customers. They may be able to gain some efficiency because they can successfully predict a higher amount of foot traffic compared to normal days.

In a nutshell: Raising prices is one way to respond to increased demand, but that would seem to go against the spirit of things, and places don't want the resulting bad rep. So, instead, they are using every other trick in the book that they can come up with. The major merchants are definitely aware of Black Friday, and they do manage to make it a very profitable day.

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Gary Becker's work on Social Demand probably has something to do with the phenonmena.

Becker basically asked why some popular places consistently seemed to underprice their goods. For example, concerts often sell out very quickly and fancy restaurants in the middle of a busy suburb might be often crowded. These venues could raise their prices, but the basic idea is that the demand for a good may not be independent of other agents' demands.

So demand may be dependent on how much other people also demand the good; you might enjoy going out to eat at somewhere that always seems popular than somewhere that gets less traffic, or you might beg your mom that you just have to go to that popular concert by [insert cool band here], specifically because all your other friends are going. Additionally, social places like restaurants and concerts often have customers who usually or only go in groups, so you could see how that would incentivize fiercer competition among these venues.

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  • $\begingroup$ I read this as well when I was researching why certain restaurants have HUGE lineups outside but keep very low prices. It's not necessarily because people like busy places, but more because the venue relies on regular customers for most of their business (I imagine the 80/20 rule applies as in any industry) and raising the prices would deter them. $\endgroup$ – JSideris Dec 2 '15 at 6:00
  • $\begingroup$ However I'm not sure that I accept your claim that "demand may be dependent on how much other people also demand the good" is an explanation for the madness of Black Friday. Lowering price doesn't change the demand curve, and network effects take time to sink in (and don't apply to every commodity that is in high demand on Black Friday, like TVs or most children's toys). If stores wanted to give discounts on goods to create a long-term increase in demand, why wait for Black Friday? Why not just give certain products away for free for the first x months until critical mass of users is met? $\endgroup$ – JSideris Dec 2 '15 at 6:07
  • $\begingroup$ Lowering the price, on the margin 1.) increases the chance someone else may talk about how cool the deal is 2.) increases the chance that someone else is willing to go with a group that was thinking of going if someone else went. $\endgroup$ – Kitsune Cavalry Dec 2 '15 at 6:13
  • $\begingroup$ Got it. That's why some of my crazy family members group up and carpool all the way down to the states from Toronto every year. $\endgroup$ – JSideris Dec 2 '15 at 6:17
  • $\begingroup$ Well there could be more to it I'm sure. ; ) My answer is the first major thing that came to my mind. $\endgroup$ – Kitsune Cavalry Dec 2 '15 at 6:23
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Black Friday is a marketing event that benefits from network effect . The more stores offer products for lower price and the more consumers know about them, the greater is the network effect.

Normally when you put your product on sale at reduced price, you have several problems to deal with. Your target consumers need to be informed of your offer and they are often hard and costly to reach with ads. If they get your ad, they may not believe that your price is actually reduced. Finally, they may not be in a shopping mood at the moment and by the time they are, your offer may expire.

On Black Friday, there is a common knowledge among consumers that stores offer huge discounts so consumers themselves often go looking for offers. While they do, they compare prices at different stores and check whether the offers are real. Many also delay their purchases for Black Friday or buy presents for Christmas season early so there is a huge spike in demand.

There is usually a very tight competition for shoppers between stores so generally most offers are legit. But of course plenty of stores resort to various tricks to make more profit on the day. I recently came across this article about tricks the stores use on BF.

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    $\begingroup$ My understanding was that if something benefits from the network effect, then the more people who use it, the more valuable it is for the people who use it. For example, facebook (and any other social media platform), stack exchange, cell phones, star trek communicators, and multiplayer online games - the more people who use these, the better it is for me to join in too. However if a billion people want to go shopping on Black Friday, that doesn't make it better for me to go shopping too. What you're describing sounds more like viral marketing. $\endgroup$ – JSideris Dec 2 '15 at 5:40
  • $\begingroup$ I don't use Facebook precisely because too many people use it and I am afraid to run into people whom I have decided to forget about. Everyone has its own complex preferences. Nevertheless, I use Stack Exchange because many professionals use it, I play some MMO games because they are of a very good quality, and I prefer to shop on Black Monday, Cyber Monday, etc. because a lot of stores are offering discounts and I am sure to find something I need at a very low price. It makes it good for stores, and stores make it good for customers. $\endgroup$ – Arthur Tarasov Dec 2 '15 at 6:06
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In a sense, I think the right question is not "why do firms offer a discount" (or, as you put it, why do smart firms not "react by increasing all of their prices in response to demand?") Rather, the interesting question is why do firms ever not discount their prices? After all, if consumers can shop around for a good deal then one would expect that all but the lowest priced firms will have a problem selling anything, so there should be a persistent incentive to try to cut prices and be the cheapest firm in the market—leading to consistently low prices.

An explanation for the coexistence of sales prices and full prices was provided by Hal Varian in his famous paper "A Model of Sales". In this paper there are two types of consumers: the first are "naive" or "lazy" or "impatient" or "uninformed" or for some other reason will not shop around for the best deal. The second type (known as "shoppers") are smart and patient enough to wait until they can identify the best deal in the market. What Varian showed is that the existence of these two types of consumer implies that firms will sometimes offer high prices to exploit the uninformed or impatient, and sometimes run sales to capture the shoppers.

This insight might seem quite intuitively obvious, but figuring out how to take this intuition and build it into an internally consistent, rigorous model was quite a significant contribution at the time. Varian's work has spawned an entire literature on 'clearinghouse models' of price dispersion, about which you can read more here.

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Another effect to consider is the existence of different target groups for different offers. These different offers may consist of the same product, but at a better or worse price. You can, for example, offer better services on top of the product, or better exchange policies.

A very nice market to observe this, is given by the flight ticket market. When you finally sit in the plane, the ticket prices for, essentially, the same service may vary greatly among your fellow passengers. This is ok, since there are different market groups, which will pay different prices for the same service, if, in this case, the ticket can be bought on much longer or shorter notice. This is one of the reasons, why tickets are much cheaper when you buy them very early. Many business people can not predict their need of tickets a long time in advance and therefore will pay higher prices.

The same is true for supermarkets. In most countries there exist different supermarkets offering widely differing prices even for the same products. But since they offer a better shopping quality or a larger assortment people will still go there.

In the case of the Black Friday Sales, the supermarkets can allude to a different market group, namely people with less money. These people would, in some cases, not buy specific products at their common price (this is also one of the reasons for many companies offering their products under different brands, often with the same quality but much lower price), and will only buy at a large discount. Without the discount there would be no sale. To distinguish these offers from the normal prices (in order to not alienate their standard customers) you have to go through some extra trouble to get these prices.

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you have to understand the difference between wholesale and retail. when you buy a tv, about half the price covers the wholesale cost of the tv to the retailer, and the other half covers the retailer's overhead (e.g. employee wages, building lease, utilities, debt service, shareholder profit).

the law of supply and demand applies to both sides of that equation, but you seem to only look at the wholesale demand. yes, on black friday, customers demand a lot of products, but they demand very little retail service. they tolerate crowded stores, long lines, distant travel and terrible hours (one day a year!). you can see the same principle in retail where larger packages are cheaper per unit (e.g. the 2-pack is almost half the price of the 10-pack). from a wholesale perspective, the more you buy the higher demand. but from a retail perspective, the more you buy per package or per visit the lower your demand for retail service.

wholesale demand will drive up prices only slowly. you can't build, tool and staff a factory for one day and then tear it down the next (yet....). so, higher demand only drives up wholesale prices if it lasts for months or years. so, on black friday, wholesale prices are generally stable, but the retail margins drop precipitously. if a retailer were to maintain normal margins on black friday, they would be lucky to get normal volume and just barely break even. however, if a retailer cuts their margins in half on black friday, they are likely to more than double their normal volume and more than make up for the margin in volume.

it is worth noting that high-volume/low-price retailers have a hard time staying open all year. if a retailer were black-friday-busy on some random tuesday in february, many customers would simply find somewhere else to shop. for example, many consumers avoid walmart, despite the low prices, because of the long lines. that said, other people do frequent walmart. there are in fact retailers like "weekends only" that claim to offer lower prices specifically afforded by their reduced retail service (not open during the middle of the week).

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  • $\begingroup$ i should point out that many of the other answers are quite accurate ways of modelling the phenomenon. however, i think that the OP focus on the law of supply and demand prompts a more direct response. misleading advertising, market segmentation and the network effect are all lovely ways of looking at the situation. $\endgroup$ – james turner Dec 2 '15 at 23:40
  • $\begingroup$ and for the record, i personally avoid retailers on black friday. for some products, i am willing to pay higher prices in order to have better retail service (specifically, less crowded stores). for other products, i am willing to forgo retail service almost entirely for lower prices (i.e. online purchase). $\endgroup$ – james turner Dec 3 '15 at 0:00
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A lot of great answers have been posted already, but I just came across this video that sums it up fairly well, and is in agreement with the accepted answer.

https://www.youtube.com/watch?v=Z9dp9I_V3Hg

To summarize, Black Friday is fueled by warranties, mail-in rebates (that often never get redeemed), and the latest research in purchasing psychology and behavioral economics that often create the illusion of savings.

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