There appears to be a general perception that if you can put off buying stuff until after Christmas you will be able to pick up bargains. The reasoning is simple: alot of people have to buy presents before Christmas, pushing up demand and hence, prices.
Neither the evidence nor theory supports this belief. US researchers, Elizabeth Warner and Robert Barsky, recently looked at whether prices were higher or lower after Christmas. In their 1995 Quarterly Journal of Economics article, they found that on average, the prices of durable goods such as televisions, cameras and electric drills, were lower before Christmas than after it. Moreover, they demonstrate that price mark-downs are larger on weekends than on weekdays.
What accounts for the low rather than high prices? The answer is that competition is likely to be more intense when you expect markets to be "thick," i.e., shopping centres are crowded. While demand is higher just before Christmas, so is the intensity of competition for that demand. And that competitive force wins out, leading to bargains, not gouging.
Retailers know that at this time of year there will be hundreds of otherwise sedate consumers hunting around to purchase various things in large quantities. Moreover, this doesn't happen at other times of the year. As a result, many sellers make most of their sales at Christmas. They stock up for it and because of this, they face large costs if they do not actually make large sales at Christmas.
So put yourself in the shoes of a retailer. You have a choice: you can keep prices high in the week prior to Christmas and then discount later to sell any surplus stock. Alternatively, you can drop prices by a little now and undercut your competitors precisely when there is a flood of consumers wandering past your store. You then do not have to worry as much later on when your competitors prices are low as well. In many cases, your profits are higher when you price lower now.
But it does not end there. All of your competitors are thinking the same (they know its Christmas Time, too). They have all stocked up for Christmas and cannot afford to miss those sales. This forces prices down.
Still not convinced? Consider this: competition can come from the future. This is not science fiction. If there were really low prices after Christmas some consumers would wait. While your children have to have an X-wing fighter on Christmas day, perhaps you could wait for that VCR or CD. You pay less and miss the crowds.
To counter this and to be sure of unloading large inventories, retailers drop their prices before Christmas, if only to compensate customers for having to put up with hordes of other harried shoppers.
The message here is simple: while surges in demand caused by an expected event can lead to higher prices, when it is seasonal, there is a supply effect as well. Retailers expect Christmas, stock up for it, and have to compete heavily to sell that stock. They are better off competing before than after Christmas when there is a crowd of buyers. And this means that if you are thinking of waiting for a post-Christmas bargain, expect to pay for it.
Joshua S. Gans is an associate professor in economics at Melbourne
Business School, University of Melbourne and an academic associate of London
Economics, Australia.
This article appeared in the Australian Financial Review, Friday 28th November, 1997, p.32.