Undercover Economist

Surviving the sales

The Undercover Economist – FT Magazine, 7 January 2006

If you’re reading this, you’ve survived the New Year sales, an organised riot arranged annually for fun and profit. In the US, there is a similar tradition of giveaways the Friday after Thanksgiving, and similar chaos as the stores open. The furniture store Ikea has added extra exhilaration to the sales experience – you may recall that ambulances were required after an opening-night sale at a London store nearly a year ago, and there have been worse incidents, including an Ikea opening in Saudi Arabia in 2004 in which three people died.

These queues and crushes create a bizarre situation where no amount of price-cutting will make customers better off. To see why, imagine that you have two choices on sales day: the first is to go hunting for a bargain; the alternative is to stay at home eating turkey sandwiches.

But imagine, too, that after a thorough brainwash with sherry and old Bond movies, you’re thinking along the same lines as everyone else. You’d be tempted by a price cut of 25 per cent as long as you didn’t have to queue more than half an hour to get into the shops and get hold of your bargain. But since everyone thinks similarly to you, a price cut of 25 per cent will attract punters only if the queue is no more than half an hour long. If it looks like growing longer, people will stick to the turkey sandwiches.

What if the offer is half price? Perhaps you’d line up for an hour. But so would everyone else. More people will arrive until the line is an hour long and the sandwiches beckon once more. In fact, the shop could be giving away its merchandise along with free lottery tickets and a kiss from Brad Pitt, but the more attractive the prize at the end of the line, the more effort everyone will expend to get it.

Reality is more complicated, of course. People have to guess how long the queues will be, and some of them will end up queuing while wishing they’d never left home. And some people like bargains more than others, which means that some people will show up pleased and surprised that the queue isn’t even longer. But the story remains essentially the same: life is not greatly improved, no matter how great the bargains become, because the crowds will build to offset the bargains perfectly. You will always be torn between going shopping and turkey sandwiches.

If this was merely a tale of a cheap pair of shoes at Harvey Nichols, we could leave the story here as a theoretical curiosity, because we don’t care whether department stores are able to give money away effectively or not.

But we do care, very much, about other efforts by governments and by charities to give money away. Governments provide roads and they become congested, to the extent where the average driver would be just as well off paying £5 and halving his commute time. They provide a few good schools, and the benefits flow not to anxious parents but to the local homeowners who can sell them expensive houses. And everyone is familiar with the concern that giving money to beggars makes begging a less unattractive occupation. In all of these cases tremendous amounts of money are spent but the beneficiaries are scarcely better off, if at all.

This is one reason – there are others – why subsidised services have so often proved to be disappointments. Retailers may occasionally abandon the idea of charging real money for their wares, but the scrums they create when they do offer discounts make us appreciate that prices are often worth paying.