In honor of Black Friday, I have a question for the ‘Economic Naturalist’. My wife and I both received Thanksgiving sale catalogues from a clothing chain retailer. A sticker on the front of my wife’s catalogue offered 40% off a qualifying purchase; the sticker on the front of mine offered 50% off. Why would a retailer send unequal offers on the same merchandise to the same address?
Let’s assume the retailer is smart enough to know something of my shopping habits – or at least that I’m male. We might guess that the retailer believes my “demand curve for shopping” – at least for clothing – is such that I require greater inducements to participate in the end-of-November ritual. All true enough, but we are still left with questions: why is my marginal business worth a greater sacrifice on price than an additional order from my wife?
One might postulate that the retailer is really smart, that it knows I’m a typical guy with a predictable reluctance to shop, but that once I do shop I remain predictable: I’m likely to order guy-staple kinds of things that seldom need to be changed or clearanced – and which are already carrying margins (perhaps, in turn, because of lower seasonal replenishment costs than, say, women’s clothes) that more than make up for the extra markdown on the cover of my catalogue.
That would be impressive. The retailer would have “modeled” me as being more price-sensitive around the clothes shopping activity itself than around the items for sale, but have calculated that it could still meet its hurdle rate for the items I am likely to buy. A different hurdle rate applies to my wife, who is more likely to buy items that must be seasonally reinvented, and which carry higher fixed costs. She only gets 40% off.
Can we poke holes in the foregoing? Oh yes.
First, I would think that a retailer as smart as described would be more successful than the one who sent these catalogues.
But one hole in my logic is my utility function. These catalogues come at a time of year when we are as likely to be shopping for others as for ourselves. If I’m a (particularly delusional) points-maximizer, I will shop the women’s section of the catalogue, which imply that these goods carry higher nominal margins. But the need to sell these goods before the style shifts remains pressing. These factors combine to present me with a greater discount. By contrast, the shirt my wife would by for me will remain sellable after Christmas. She only gets 40% off.
The catalogues come with different promo codes. I could check out whether the fine-print “excluded items” language, restricts the 40$ and 50% shopper in different ways or steers them in different directions.
Bob Frank would probably expect a student to check this out, but I’m not going to do it. My reservation markdown for visiting this retailer is far greater than 50%.