Millions of Americans rush to the stores on Friday, following the Thanks Giving day, in a hunt after sales and deals that thousands of shops all over America offer on that day. In this short article we explain the economic reason behind this tradition – price discrimination. In particular, we explain why sellers do not offer these kinds of sales on a regular basis, and why inconveniences of the sellers (very early hours, large crowds, and even violence) are essential for Black Friday’s success.

(source: rawsilkandsaffron.files.wordpress.com/2010/11/black-friday-lines.jpg)

(source: i.usatoday.net/communitymanager/_photos/on-deadline/2011/11/24/blackfridayx-large.jpg)

In a previous article we explained the concept of “price discrimination”, why firms want to discriminate prices, and how we as buyers can take advantage of this practice. 

In short, sellers can often increase their profits considerably, if they can identify groups of buyers with different willingness to pay and sell to these groups at different prices. Intuitively, if a seller is forced to sell to all customers at the same price, this is a constraint on his freedom of action. The ability to discriminate prices is equivalent to a removal of that constraint.

Consider an example. Suppose Wal-Mart’s wholesale cost of a 42” TV is $500, and there are two customers: A – is willing to pay $800, and B – willing to pay $900. If Wal-Mart must charge one price to both customers, it will charge $900 and therefore only customer B will buy, resulting in a profit of 900 – 500 = $400. However, if Wal-Mart can discriminate price and sell to buyer A at $800 and to buyer B at $900, its profit becomes 800-500 + 900-500 = $700. This example illustrates how the practice of price discrimination raises sales and profit (Wal-Mart doubled the sales of TVs and increased profit by 75%). The tradition of Black Friday sales frenzy relies on the principle of price discrimination.

The Black Friday sales are a mechanism to separate customers with low willingness to pay (like buyer A in the above example) and charge them lower price. The premise is that buyers with low willingness to pay also have low value of time. These buyers are willing to wait in line for hours, and sometimes camp in front of a store for a whole night, in order to get the best deal. Black Friday sales events involve a great deal of inconvenience – large crowds, early morning hours, traffic, and sometimes violence in stores. The premise behind the Black Friday sales is that customers who are willing to pay high prices for the items (like buyer B in the above example) would rather stay at home and buy the items at higher prices on a different day.