How was your Black Friday? Did you buy all your necessaries for Christmas? How much money you think you saved?
This shopping festival has a history of more than half a century. With the development of technology, we have Cyber Monday now, leading to the change of the consumption from offline to online. In 2019, Black Friday online sales reached $7.4 billion, the second largest online shopping day ever, according to Adobe Analytics.
What do you think?
For me, a conclusion has been made already. Black Friday (or other shopping festival, for example Cyber Monday) is just a qualifying. Businesses and the capital behind them use this method to sequence the class for every consumer in order to gain more benefits.
Capital is all about seeking profits, but how?
In order to gain more profits, businesses need to optimize product layouts. By doing so, they can sell both cheap and expensive products and earn money from the poor and the rich. Here comes the first concept, price discrimination.
In short, price discrimination means different prices of one item for different people. If you are rich, businesses sell their product in a higher price; if you are poor, this product is cheaper, but more poor people can afford. Now imagine, if you are the businessman, how can you do this?
The most difficult part is to distinguish the poor from the rich, so that you can set different prices and earn more consumer surplus. Capitalists and businesses have already figured out an effective way, and give it a nice name, Black Friday.
With the rise of internet and more businesses participating, the competition is more intense. Therefore, businesses come up with more tricks, like promotion codes, loyalty programs, gift cards, cashback and other activities rather than simple discounts. All these promotion codes and cards are using the theory of price discrimination.
Let’s take an example, a headphone of brand β, the market price of which is around $500. Here comes the Black Friday, and customer A has a budget less than $450, he would start research one month in advance, sharing, posting, liking in social media to win special discounts and promotions. When Black Friday finally comes, he gets the headphone at $450 depending on his research and promo codes. Customer B has a budget around $450 to $500, let’s say $480. He would not work that hard as A. He may spend one hour looking at some ads and buy the headphone at the price of $480.
Customer C, who has a budget more than $600, doesn’t care about shopping festivals like Black Friday, not to mention spending time and energy in doing research. If he wants a headphone, just buys it at market price.
Customer D has no budget. He already has headphones of brand α, γ, δ…and wants brand β for collection. He may not know Black Friday, so he buys the headphone from a profiteer introduced by friends at the price of $800.
Now we take a look at these 4 types of customers. Customer A would like to spend a lot of time in researching because his time is cheap and he is in lower economic level. A is more price sensitive and will not buy this headphone without Black Friday. Businesses may never earn money from customer A. Now with the help of Black Friday, it is easy to distinguish these customers and offer them promotions to earn their money. Same with customer B. For customer C and D, they don’t participate, this also helps sequence and distinguish them. They will buy headphone anyway, even without coupons or promotions. So far, capitalists complete earning money from both sides.
Here comes the second and third concepts, consumer surplus and welfare loss.
Consumer surplus refers to the difference between the price consumers are willing to pay and the market price for a product. For customer D, who buys the headphone $300 more than market price, this $300 is consumer surplus. For customer A, who has saved $50 for the headphone, he reduces his welfare loss. If the price stays unchanged, customer A will never buy the headphone so they can not enjoy the product. The headphone of bran β is produced, however, those want it can’t get it, this is a kind of social welfare loss. Now via price discrimination, customer A can buy the headphone, which reduces the welfare loss.
Capital can do good things, right?
Careful, there’s no right or wrong, good or bad for capital, it only cares about benefits. There are other activities use price discrimination, for example, discounts of a student ID, buy one get one free for Starbucks.
Price discrimination helps merchants and customers reach win-win situation. On one hand, businesses can sell more and earn more, having more consumer surplus; on the other hand, customers can buy things at a cheaper price by investing their time and energy, reducing the welfare loss.