Holiday Season Smog
Written by: Geoffrey Xue
With Amazon Prime Day 2020 ending today and the soon-to-be chilly temperatures hitting, we’re starting to move towards the early phases of holiday seasons and shopping. Many businesses are already offering discounts and coupons, anticipating larger and larger crowds as we progress through the 4th quarter business season (Oct 1 - Dec 31). However, it’s clear that businesses will not be able to run stores and holiday events, like Black Friday, normally this year. Many will have to adapt to online websites and transactions, accelerating the rate at which Cyber Monday surpasses Black Friday, but the upfront costs of development are sky high.
First, it’s important to know why Black Friday and other “sales days” are so important, and ultimately how the Thanksgiving weekend contributes 2.6 trillion (in ‘18, )to the GDP. Shopping days like Black Friday reuslts in retailers adopting the uses of loss leading and price discrimination to make the most profit. The retail industry, in general, works under monopolistic competition, as there are thousands of stores in-person and online for customers to purchase from. This means that the consumer market is relatively limited, and so while they’re price-takers, they must differentiate greatly or lower their prices. To attract customers, some will intentionally sell goods at a lower price than the average total cost of a product, making a negative profit for the good but attracting tons of customers. This, in turn, leads to consumers purchasing other goods at the same time because they’re in the store already or need to reach a “free shipping” point. This technique is called loss leading. Aside from loss leading, businesses will also offer bundle deals, coupons, and sales for price discrimination. Generally, price-sensitive shoppers will flood the online market and the stores on these days, while price-insensitive shoppers, or those that do not have the time to push their way through crowds or wait for online sales to pop up, stay back and don’t shop. This allows stores to grab a huge portion of consumers that they initially had few of or were deadweight loss originally with the higher prices, as they weren’t willing to pay the additional gap from the socially optimal price. As shown in the graph below, decreasing the price and preparing enough quantity results in a lowered deadweight loss. This split between consumers, using the day itself and all of the sales, discriminates the price so that retailers could entice the 189.6 million US consumers, each shelling out $361.90 in the four-day weekend plus Cyber Monday, out of their homes in 2019.
https://www.desmos.com/calculator/ydmxvchzd6
For businesses to capitalize on the holiday season in COVID and capture the interest of consumers this year despite the massive unemployment rates and the lieu of other issues, money will have to be sourced to the general public for transactions to occur. One viable method would be to offer spendable money that must be used for local businesses, which would help encourage people to go out and splurge. COVID will definitely accelerate Cyber Monday’s growth, increasing already a positive trend. In fact, Cyber Monday has already been more profitable than Black Friday, raking in 9.4 billion compared to Black Friday’s 7.4 billion and up from the previous 7.9 billion from ‘18. Cyber Monday and online sales are clearly profitable, but the transition over to online sales may be tough.
For stores jumping the digital hurdle, upfront costs will be a huge limiting factor. Ecommerce and selling products online is already a chore, requiring stores to keep tabs on both online and offline sales for inventory management. Additionally, getting stores remotely competitive anywhere will require ads so the website runs up at least into the first few pages of google on a search. If they choose to, stores will also face the upfront costs of developing a website, which a user-friendly one will cost $6,000 and at least hundreds to maintain the website every year. Stores could turn to alternatives like Shopify, where pricing is significantly cheaper, but will have to take a small dent of 3% and still have to develop a website from a theme (albeit with tools). Selling on Amazon, another alternative, will bite 8 - 15% off of your sales as well. All in all, for some small businesses, taking the risk of websites can make them go in the red.
All in all, businesses face the predicament of either jumping to online selling with large risks or facing a definite lower-than-usual Black Friday profit. For whatever they choose, stores will be forced to an unwelcome ultimatum before the waves of crowds - online or offline - start to hit the markets.
Works Cited
Amadeo, Kimberly. “What Is Black Friday?” The Balance, 31 July 2020, www.thebalance.com/what-is-black-friday-3305710.
Carney, Lucy. “How Much Does a Website Cost in 2020? (Full Breakdown).” Website Builder Expert, 5 Oct. 2020, www.websitebuilderexpert.com/building-websites/how-much-should-a-website-cost/.
Halzack, Sarah. “How Retailers Should Prep for a Weird Covid-19 Black Friday.” Bloomberg.com, Bloomberg, 15 Sept. 2020, www.bloomberg.com/opinion/articles/2020-09-15/how-retailers-should-prep-for-a-weird-covid-19-black-friday.
Mayefsky, Eric. “Black Friday: What Are the Economics behind the Sales?” The New Economy, 25 Nov. 2015, www.theneweconomy.com/business/black-friday-what-are-the-economics-behind-the-sales.
Mayefsky, Eric. “What Are The Economics Behind The Black Friday Sales?” Forbes, Forbes Magazine, 27 Nov. 2013, www.forbes.com/sites/quora/2013/11/27/what-are-the-economics-behind-the-black-friday-sales/.
NRF President and CEO Matthew Shay. “Thanksgiving Weekend Draws Nearly 190 Million Shoppers, Spending up 16 Percent.” NRF, 3 Dec. 2019, nrf.com/media-center/press-releases/thanksgiving-draws-nearly-190-million-shoppers.
Pricing. (n.d.). Retrieved October 13, 2020, from Amazon.com website: https://sell.amazon.com/pricing.html
UtilityNYC. “How Much Does It Cost to Develop and Build an App.” UTILITY, 1 Sept. 2019, utilitynyc.com/blog/app-development-cost.
A lot of what you said about what firm’s do during black friday/cyber monday seems strange, but expected such as lowering prices below the actual total cost for higher demand items. That way consumers reach deeper into their wallets and buy other products in the store. I was slightly confused on what price discriminating was (what you said makes sense it’s just hard to understand). It just seems strange to me that it would work for producers to change the price on similar products for different markets. Also, I was surprised by the fixed costs of starting an ecommerce store; I thought it would be a lot simpler and less expensive. A lot of the facts you brought up seemed counterintuitive to me, so it made me think.
ReplyDeleteI thought your post was very insightful! WIth the COVID-19 pandemic going on, it is no surprise that businesses are struggling financially because of it. In your blog, I loved how you talked about some of the intentions behind how black friday is ran and the profit comparison between cyber monday and black friday; the information in both of these topics were new to me, so I found them very interesting. Going into this holiday season, I wonder how much profit businesses will make, as a whole, on cyber monday rather than on black friday... In addition, I wonder how many stores will actually offer black friday shopping at there store because of the pandemic. Good job!
ReplyDeleteI think you chose a very interesting topic. One thing I would suggest if finding a different graph that shows all of the information that you were talking about. I think it was just cut off.
ReplyDeleteWow I haven't really considered what the adjustments and changes will look like this holiday season with COVID. Thinking about how Black Friday is usually conducted with mass amount of people, this inflicts fear because of the relentless drive some people have to save money and get a really good deal. I know that in the past there has been dangerous situations with guests fighting over items, what do you think about these risks decreasing due to social distancing? Overall very great topic and interested me a lot.
ReplyDeleteVery Good Job! I thought this was a very unique blog and something that I haven’t thought that far ahead yet. Obviously, Cyber Monday will have huge growth this year because of the pandemic and people not wanting to leave their house. Cyber Monday has been growing more and more, but this year due to the pandemic circumstances it should grow more than usual. As well, it is hard with the restrictions you talked about with Black Friday to know if the sales will stay up or go down. Chances are that Black Friday will go down due to the restrictions, but Cyber Monday should make up for the Black Friday decrease. Good Job!
ReplyDeleteThis is super interesting, I figured black friday would be smaller this year since we can't have big crowds, I assume there will be lines out of stores all day. I work at target and even last year I feel like black Friday wasn't as big as cyber monday because everything is becoming online now anyway. Great work!!!!!
ReplyDeleteIt's crazy to think that this year is almost over and the fact that people wont be able to participate in things such as black Friday which to some families is a tradition. And going off of that how much money some companies will loose because of limitations due to corona. Some companies may thrive while others die. Very nice job!
ReplyDeleteThis was a very interesting story to hear about, especially due to the continuous increase in the importance of Black Friday to many businesses in recent history. I personally believe many businesses will switch to online shopping in an attempt to ensure profits this Black Friday, although I'm not sure how many will be able to get their new or refurbished websites in time for the shopping season. I think the biggest winners continue to be online stores, who don't have to pay for a new website and can reap the large benefits of their preexisting online store. Additionally, I feel that a long term change due to the Corona Virus will be a shift in favor of online shopping for many, meaning online stores will continue to become more popular and earn large profits as time goes on,at least until more businesses complete the shift to go online with their stores.
ReplyDeleteI hadn't thought of how Black Friday will be different this year! It is crazy how much the pandemic can impact economic actions. The theory behind loss leading is fascinating. It is not intuitive that lowering prices below a good's profit-maximizing point would increase total revenue, but in this case we need to consider all of the goods a store sells. It is similar to substitutes: as the price of one good decreases, the demand for related goods increases. In this case, as the price for one specific item at a store decreases, the demand for all other items in that store increases.
ReplyDeleteI wonder that given the economic depression that occurred due to COVID-19, combined with the fact that the unemployment rate has skyrocketed, and with millions struggling to make rent and facing eviction, if the amount that people are willing to pay on Black Friday will decrease. This may be one of the less profitable Black Fridays in the past decade or so.
ReplyDeleteI wonder how the elasticity of goods is affected with job loss and tight budgets for many families this year? Part of that may even make Cyber Monday and Black Friday more popular because both play off of the elasticity of goods by offering lower prices. Perhaps we may see some good go "lower than ever before" in order to attract hesitant consumers. I also feel like certain goods may fly off the shelves, like board games and in home entertainment, more than usual during the price reduction due to the pandemic. However, because board games (for example) are becoming "less elastic" (more people feel a real need to have them), I wonder if the prices will lower much at all?
ReplyDeleteThis concept overall is very intriguing and insightful. With Thanksgiving, Black Friday, Cyber Monday, Christmas, New Years coming up in the next 3 months it brings up the question of how all shopping is going to continue. The literal fact that the GDP went up by 2.6 trillion dollars is insanity. Businesses purloin money from these people throughout these months as they offer so many “discounts” and lead customers, however they would abscond from doing any of these tricks. While many huge retail businesses are going to be in a brouhaha about online shopping, many small businesses and local businesses are going to be in a massive kerfuffle. These businesses are being put in the kiln and are potentially going to suffer immensely. Overall it will be very interesting to see how the COVID-19 pandemic will mix with the new upcoming shopping season and how things will change due to it.
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ReplyDeleteOn paper price discrimination doesn't make much sense so I can understand how it could be confusing for some people but you do a really good job of explaining how in execution the practice actually has phenomenal benefits for producers. I think i addition to exposing consumers to more products price discrimination can also function to expose more people to one another during the pandemic because it provides a greater incentive to appear in person on black Friday. I think in some ways this is an ethical concern. I know that some places are extending black Friday to multiple days but in some ways doing this incurs a lose because they are reducing the amount of hype that accompanies black Friday.
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