This year, Toys "R" Us is opening its doors at 5 p.m. on Thanksgiving Day. Not to be outdone, Kmart will open at 6 a.m., and will remain open for 41 hours straight. And Macy's, for the first time in its 150+ year history, recently announced that it too would jump on the bandwagon and open at 8 p.m. on Thanksgiving.
While many consumers have decried this commercial encroachment into the holiday, millions of Americans will still bargain hunt on Thanksgiving. After all, if there weren't any demand for Thanksgiving shopping, stores wouldn't bother opening, right? So is this slippery shopping slope the result of corporate greed, or our own desire for deep discounts?
With savings like these, who needs family?
To answer this question, let's try a little bit of modeling. Suppose that there are two competing stores, A and B, deciding whether to open on Thanksgiving. Since the stores are competitors they don't share information, and there's no way for one store to know the other's plans in advance. To keep things simple, let's suppose that there are $1 million up for grabs each day; when both stores are open, they split the business evenly, and when only one store opens, it takes all the business. Also, if neither store opens on Thursday, the pent-up demand will result in $2 million up for grabs on Friday.
Oh, and one more thing. There tends to be a media backlash whenever a store announces that it will open on Thanksgiving. To account for this, let's suppose that this negative media coverage has an adverse effect on stores that open on Thanksgiving. This "negative media penalty" will amount to a $400,000 loss for one store if it opens early; if both stores open early, they'll both get covered by the media, and will split the penalty.
What should the store owners do? Well, they each have two options: open Thursday or open Friday. This gives four possible outcomes:
|Store A||Th||$800k, $800k||$1.1m, $500k|
|Fr||$500k, $1.1m||$1m, $1m|
Let's unpack this a bit. It's easiest to start in the lower-right square: if both stores open on Friday, then they'll divide $2 million evenly. Similarly, if both stores open on Thursday, they'll divide the pot evenly, but they'll also split the penalty, so that each store only earns $1m - $200k = $800k. Meanwhile, if one store opens on Thursday and the other opens on Friday, the first store will earn $1m - $400k = $600k on Thursday, plus another $500k on Friday, for a total of $1.1m. The store that closed on Thanksgiving, however, will only earn $500k.
If you owned one of these stores -- say, Store A -- what should you do? You don't know what Store B will do, but you do know that if they open on Thanksgiving, so should you ($800k > $500k). And if Store B opens on Friday, well...you should still open on Thanksgiving! In this case, you'll earn an extra $100k ($1.1m >$1m). No matter what, you'll earn more money if you open on Thanksgiving.
But by the same reasoning, Store B should open on Thanksgiving. In other words, if the owners think things through, they'll both open on Thanksgiving, and earn a cool $800k.
That's not bad, but it's not good either, since both stores would've earned more money by cooperating and opening on Friday. So we've got a dilemma on our hands (a Prisoner's Dilemma, to be precise): how can we encourage cooperation when there's so much incentive to open early?
Well, for starters, this choice doesn't happen in a vacuum. These stores must decide whether or not to open on Thanksgiving every year. So, over time, they do learn something about the behavior of their competition. For example, if Store A notices that Store B never opens on Thanksgiving, it's less risky for Store A to decide to postpone its holiday opening (although there's still a financial incentive to open early, there probably isn't an ethical one).
Of course, in the real world stores aren't going to stop opening on Thanksgiving any time soon. If anything, encroachment into the holiday advances farther each year. And with so many stores competing, the decision of when to open is based on many complex factors. In the end, though, there's a surefire way to get stores to reverse course: resist the urge to close out the holiday at the mall, and digest your meal in the company of family and friends instead.
Teachers: want to explore the economics of holiday shopping with your students? Check out our latest lesson, Gobbler's Dilemma!