Wednesday, November 27, 2013

How to hurt the poor this Thanksgiving

Thanksgiving is a wonderful time of year to consider all sorts of interesting insights from game theory. For example, several firms this year are advertising that they'll begin their traditional Black Friday pricing at 8:00 PM, Thursday evening. It seems like each year, the start time creeps back. Why doesn't anyone start Thursday morning?

Let's think through it step by step. We have two competitiors, S-mart and X-mart. If S-mart decides to start it's sales in the morning, it can capture more sales. Now X-mart must start it's sales early in response, if it doesn't want to lose too many sales. Any advantage to starting earlier is washed out if competitors are free to respond. If everyone starts too early, and sustains sales too long, this could have a negative impact on profits. What we observe appears to be tacit collusion each holiday season among major retailers to start their sales at the same time, but no clandestine meetings need take place for this to happen. Move, counter move. Action, reaction.

Imagine my feigned surprise at seeing this floating around America's favorite social network:

Because I believe in family, I pledge to not shop on Thanksgiving. If I'm shopping, someone else is working and not spending time with their family. Everyone deserves a holiday.

This is a dynamic game, people. Static thinking isn't appropriate. Unfortunately, that's all even the most intelligent Joe was exposed to in school. Let's see what we can learn from a classic boycott: gas is too expensive, so we're all going to pledge not to buy fuel on one day. We don't actually change our fuel consumption, so in order to not get stranded on boycott day, we all fuel up the day before. A change in demand without an accommodating shift in supply means we all end up paying higher prices the day before the boycott. If you don't see the irony, you're not paying attention.

What happens on the other side of the market? More bad news: if producers expect prices to go up the day before a boycott, they can make more by selling that day instead of the day before, when price will be lower. Supply contracts on preceding days, and we could well end up having higher-priced gas than usual several days leading up to the boycott. The net effect on price or profits isn't clear from this informal analysis, but the boycott may well end up lining gas companies' pockets.

Back to Turkey Day. The first thing that strikes me about this boycott is that it presumes others share your preferences, beliefs, or values. This isn't uncommon with public rhetoric, and usually isn't a critical flaw. The problem is presuming people who work on Thanksgiving share your preference not to work during holidays. In the several days I've been procrastinating writing this post, a few friends commented that some folks don't have families, that they don't want to be with family on Thanksgiving, or that they prefer to work (and sometimes earn overtime).

What would be the likely effects of a successful boycott? There would be real inconvenience as those with more money than time can't scramble to buy cranberry sauce on the way to sweet Aunt Jane's for the annual battle royale. But what of the exploited workers we're trying to protect? I doubt we'd see huge job losses, but that doesn't change the fact that workers will be out of pay. Yes, many jobs require employees to work holidays, but every hourly job I've ever worked also allowed holiday leave with enough notice, usually two weeks. In fact, all of these establishments had abbreviated holiday hours, and the management were the only ones on the hook for working a shift. Are we aiming to alleviate the strife and exploitation of middle management?

The real rub is that Thanksgiving represents a real retail discontinuity. With our gas boycott example, consumers smooth their behavior by purchasing before or after. What sort of demand is there for cranberries and stuffing the day after? Workers who don't sling pumpkin pie on the day in question don't get to work extra hours afterward. They really are out of the four to eight hours denied by well-intentioned boycotters.

Intentions matter for your salvation, but only consequences matter for the salvation of others.

I'm beginning to think that the most useful change in thinking brought about from learning economics actually comes from understanding countervailing forces in dynamic contexts. Game theory can give us that, without all the ideological baggage students bring in to an economics classroom.

If there's a policy meme to be had from euvoluntary exchange, it's that often the people you want to help with a regulation are the very people you end up hurting. An obviously corollary is that if you really care about helping someone, sometimes the best course of action is inaction.

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Do you have suggestions on where we could find more examples of this phenomenon?