The Craziness that is Black Friday

Retailers seem to be opening their doors earlier and earlier on Black Friday.  Some open at 5 A.M., others at 3 A.M. Toys-R-Us even opened their stores at 10 P.M. on Thursday night!  I've never been shopping that early in the morning and really don't ever plan on it, but having studied economics quite a but maybe I can try to figure out why they insist that midnight is the best time to sell a Barbie.

There is definitely a strategy here that basic knowledge of game theory can help us understand.  On this particular day, consumers tend to be in a crazy buying mood and insist on buying everything they can as soon as they can get it, and the discounts stores offer the public just serve as catalysts to these crazed consumers. Knowing this, stores must compete against each other in order to capitalize on the buyers's moods.

This is where game theory comes in.  Each store offers crazy discounts to get their names out there and draw a crowd of campers outside their doors to attract media attention, but its not really over prices that these stores compete: its all about being the first store open.  Since customers want to go spend their money like its going to catch fire in their pockets, stores must make them selves available to these buyers.  If their competitor is open, the only way they can attract more customers is to lower their prices, which cuts into their profit and they'd rather not do.  But if they open their doors just an hour beforehand, they literally have no competition for an hour and are a monopoly for a brief time period.  By being the first one open, customers line up at your doors, waiting to buy your goods and them move on to the firms that are opening later.  You don't have to offer crazy sales because you're a monopoly; if someone wants to buy a Suzie-Talks-A-Lot at 3 A.M., you're the only one that customer can go to!

Now, every store has the incentive to open just before their competitor. That is why every year the stores open earlier and earlier in the morning, with Toys-R-Us opening on Thanksgiving night. Stores will continue to open earlier each year until an equilibrium is met, that is, when they all open at a time that maximizes their profits for the day.  No one knows for sure what time this will be or when we will reach it, but here are estimates that stores will begin opening on Thanksgiving day.

In game theory, we can think about it this way.  Suppose there are only two stores, Store A and Store B.  If store A opens early and store B opens late, store A gets all the customers and B gets none.  The same is true the other way around, with B opening earlier and getting all the customers.  If the two stores open at the same time, the split the sales 50/50.  As you can see, both stores want to open early to maximize their sales.  Opening early is called their dominant strategy, because no matter when the other company opens, the firm in question will want to open early.  (The payoffs are "open early"= 100% or 50%, "open late"= 50% or 0%.  The company would rather have the first odds, where there's the chance of getting all the customers, and worse case scenario is only half.)

So the reason stores keep opening earlier and earlier is not because they enjoy selling televisions at 2:00 in the morning, but rather because it gives them the best payoff matrix they can manage for that crazy day.