January 3rd, 2016 · No Comments
Behavioral Econ · Tumblr
December 19th, 2015 · No Comments
Incentives · Tumblr
December 17th, 2015 · No Comments
Macroeconomics · Policy · Tumblr
December 8th, 2015 · 1 Comment
Buyer Beware · Game Theory
Well color me not surprised…
Did anyone really think that stores being open on Thanksgiving was actually going to substantially increase how much consumers buy rather than just change the timing of purchases? I like an intoxicated post-turkey Target fest as much as the next person, but this just seems largely implausible, if for no other reason than it’s difficult to increase sales without increasing consumers’ incomes. It may be tempting to conclude that the stores are making bad decisions here but, as usual, a little economics can shed a lot of light on the matter.
First…hey, remember the prisoners’ dilemma?
The basic principle of the prisoners’ dilemma is that the payoffs of the game make it such that not cooperating is superior to cooperating for a player regardless of what the other player does, and individual incentives result in an equilibrium outcome that is worse than what would happen if the parties could commit to cooperating. The prisoners’ dilemma setup has been used to explain a number of outcomes that we see in the world- including, but not limited to, arms races. And anyone who’s witnessed Black Friday shopping firsthand should not be surprised that I’m comparing it to an arms race.
Think about it…retailers would probably be better off if they all agreed to not be open on Thanksgiving, since they would likely be making pretty much the same sales without having to incur the costs of being open as many hours. BUT…if a retailer thinks that no one else will be open on Thanksgiving, it has an incentive to open on Thanksgiving in order to try to capture the sales of shoppers who are either impatient or hate their families. Similarly, if a retailer thinks that everyone else is going to be open on Thanksgiving, it’s optimal to open on Thanksgiving in order to not get left behind when shoppers get impatient. So what happens? Stores follow their individual incentives, open on Thanksgiving, and achieve the prisoners’ dilemma or arms-race outcome where they’re basically back where they started but incur an additional cost. In addition to not being great for the retailers’ bottom lines, staying open on Thanksgiving puts an unnecessary burden on those employees who are pressured or forced into working on Thanksgiving. (Those workers who are cool with working on turkey day, more power to you.)
So what can be done to mitigate the inefficiency of this situation? We know from the prisoners’ dilemma that non-binding agreements to cooperate don’t work because of the incentives to renege, and besides, cooperation (especially binding cooperation) runs afoul of that whole antitrust thing. Companies are left with what is essentially a coordination failure, leaving government as the store closer of last resort. This gets into uncomfortable territory on a number of levels, not the least of which being that it’s not obvious what companies are playing the arms race game and which have efficient reasons to stay open on Thanksgiving. (Also notice that, while some states do still have “blue laws” on the books, requiring businesses to close on a wider scale is largely uncharted territory.) So, for now, we’re stuck with the consumption arms race. That said, some companies have actively tried to buck the trend by trying to get customre cooperation rather than competitor cooperation. Case in point, from REI:
I worry that this is not entirely generalizable, but it’s at least an interesting start.