Black Friday is a relatively new phenomenon in the British retail sphere. The event originated and proliferated across the Atlantic as a sales holiday to follow ‘Thanksgiving’, in the UK the concept introduced by American retailers unleashed an unstoppable force.
At its launch, Black Friday was largely successful but its movement into the mainstream has failed to encourage continued rates of higher expenditure during the run up to Christmas. Last December consumer spending dropped by 2.5% on the year previous suggesting that consumption doesn’t grow but stays static and occurs earlier.
During the Christmas period consumers need little incentive to spend more. Consumers at this time of year are less price sensitive, they need to buy presents for their friends and family and will be prepared to spend a little more than they might otherwise do. Thus, one might muse that sales earlier in the year when consumption is inelastic would be folly. Despite this, Black Friday has become an ongoing theme in retail and appears established in the market. Why should this event perpetuate, perhaps game theory can give us the answer.
Black Friday, the Non-Cooperative Game
Game theory is a tool used within the economics discipline to analyse economic actor’s behaviour when looking at models of conflict and cooperation. In a non-cooperative game, there are two players whom are competing with one another to maximise their private payoffs and can only do so at the others expense.
One example might be two coffee shops on opposite sides of the road. Both earn an income from their local population. Both are considering the benefits of marketing expenditure to attract local consumers.
I consider that ‘coffee shop A’ embarks on a marketing campaign, spending £100 on advertising, earning them £200 of business. But, this comes at the expense of coffee shop B whom earns £100 less because of the reduction in market share. If coffee shop B responds with the same £100 marketing campaign they will both only make an extra £50 each. Thus, both would end up with a net loss of £50 with the highest payoff available only to the one whom advertised when the other didn’t. This situation is referred to as a Nash Equilibrium which is a condition in which neither player has incentive to deviate.
COFFEE SHOPS:
| Coffee Shop B, No Marketing | Coffee Shop B, Marketing | |
| Coffee Shop A, No Marketing | £1000, £1000 | £900, £1100 |
| Coffee Shop A, Marketing | £1100, £900 | £950, £950 |
Can we use this coffee shop marketing scenario explain the Black Friday sales phenomenon.
If we construct a simple model where there are only two retailers, A retailer can engage in a ‘Black Friday’ offering, at a cost. The cost being the forgone producer surplus transferred to consumer surplus. Retailers lower prices to increase market share, trying to eat a bigger slice of a fixed sized pie. A shop engaging in black Friday makes less profit per unit but in turn sells more units.
A rival retailer will observe a reduction in their market share which forces them, in turn, to offer a similar Black Friday sale. Under this equilibrium both are reducing margins but neither is benefiting from an increase in market share.
Under this scenario, we would also observe a considerable first mover advantage, whereby if one retailer offers a Black Friday deal first, it is likely that they will capture more market share at the cost of the other whom must attempt to wrestle it back. This year Amazon has started its sales a whole week sooner to a larger market share.
This method of analysis with respect to Black Friday sales is limited in that the model is a simplification of the retail market there are far more than two retailers and not all retailers compete as directly. We also postulate under the above coffee example that every retailer loses, however, retailers like Amazon benefit from the market share increases due to their lower operating costs compared to its competitors. Outwith the simplification of the model and the amazon anomaly the analysis is useful for those in the industry of a more traditional sales strategy. To capture more market share by reducing prices at a time where consumer expenditure is less price sensitive may improve a first movers market share, but, creates an environment where others must employ discount too. Black Friday results in a Nash Equilibrium wherein everyone squeezes margins but the size of the market remains static, leaving most of the retailers worse off and unable to deviate from their current strategy. Despite this tragedy for retailers there is clearly one big winner, consumers.