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Demand theory

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  • Chapter 2: Microeconomics/
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  • Demand theory

The importance of Black Friday

The last week of November is one of the most significant periods in the year for retail spending. Black Friday (the Friday following the Thanksgiving holiday) is a calendar date that is synonymous with shopping. Black Friday and the following Cyber Monday are increasingly online retail events, but when you combine them with in-store sales they are the busiest shopping days of the year in many countries.

In recent years, Black Friday has become a global retail phenomenon with retailers in counties all over the world adopting it as a period for sales. An event that started in the US is now also a key retail period in Europe and Asia. Historically Black Friday dates back to the 1950s when police in Philadelphia and Rochester used it to describe crowds and traffic conditions on the Friday following Thanksgiving. It was also a term used to describe a US stock market crash in 1869.

These are some black Friday sales statistics from the US:

  • $180 billion value of sales
  • 84 million in-store shoppers
  • 93 million online shoppers
  • 24% of all online sales were through Amazon
  • 25% of all online sales are made from smartphones

Here are some observations of Black Friday from an Economic perspective:

The people drawn to buy products on Black Friday may be more price-sensitive which means demand for goods is relatively price elastic compared to other times in the year. People who wait for Black Friday discounts are likely to see price as their main buying factor. By discounting goods in a period when demand is relatively price elastic, retailers can increase their sales revenue.

Retailers use Black Friday as an opportunity to sell complementary goods to ones offered in the sales. For example, a discount on laptop computers may draw consumers in to buy a new laptop but they might also buy new software, product insurance and accessories such as a case. Again, this is an opportunity for retailers to increase their revenues.

From a macroeconomic perspective, Black Friday can be an indicator of consumer confidence and trends in consumption spending. Initial data from this year suggests US consumer confidence is relatively strong based on good Black Friday sales figures.

Black Friday has behavioural economics significance. From a framing bias perspective, consumers are attracted to the word ‘sale’ because it suggests they are getting a ‘better deal’ than normal. Black Friday can also have a ‘bandwagon effect’ on consumers. If everyone else is shopping on that day you feel you should be shopping as well.

Overall, Black Friday has significance from a microeconomic and macroeconomic perspective because of its impact on consumers and businesses.

Discussion questions

1. Explain why the demand for goods might become more price elastic during the Black Friday sale period.

An explanation that the PED of goods may be lower (more inelastic) outside of the Black Friday sales period because consumers who buy at this time are less price-sensitive. This may be because higher-income individuals buy goods outside the Black Friday sale period. During the Black Friday period, lower-income more price-sensitive consumers might be attracted to the market which makes demand more price elastic.

2. Explain how retailers can use Black Friday to increase the demand for complementary goods.

An explanation that as more people are attracted to buy goods on sale during the Black Friday period they are also attracted to buy complementary goods that can be sold at normal prices. This could increase the revenues and profits of retailers. For example, an electrical retailer might offer a significant discount on a laptop computer and this leads to an increase in the quantity demanded for the good and it may also lead to an increase in demand for the complements of the laptop such as software, accessories and insurance.

3. Discuss the importance of the use of choice architecture by retailers to increase the demand for their goods.

An explanation that choice architecture is the way businesses present the products they sell to consumers. It is an important part of behavioural economics and can be used by firms to increase demand for their goods and services. For example, a retailer like Ikea designs its store layout so that buyers are taken around the whole store so they see every product Ikea sells. This can increase Ikea's revenue because so many goods sold by retailers are 'impulse purchases'.

Black Friday can be seen as an example of choice architecture because of the emphasis on the use of the word 'sale' in the way the price of a good is presented which consumers have a psychological attraction (framing bias) to. People feel they are getting a 'better deal' if a good is discounted in a sale.

It is, however, worth considering the problems to measuring the impact of choice architecture because other factors also affect the demand for a firm's good such as consumer income and the price of complements and substitutes.