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Christmas economics: Challenging some common beliefs
The idea that Christmas might incur a welfare loss has been well known to economists since Joel Waldfogel published his research on the deadweight loss associated with the holiday season (Waldfogel 1993). In addition, several articles discuss topics like Christmas pricing, weight gain at Christmas, and the optimal height of Christmas trees. In a recent paper (Birg and Goeddeke 2014), we present findings that contradict some common beliefs about Christmas held by economists (and maybe non-economists too).
Do you believe that prices peak during Christmas time?
Basic economic theory suggests that before Christmas, demand for Christmas-specific goods such as certain foods or consumer goods increases, causing the demand curve to shift outwards. As long as this is not accompanied by an increase in supply, we should expect to see higher equilibrium prices at Christmas. But empirical research shows the opposite – Warner and Barsky (1995) find falling prices for consumer goods such as action figures, power tools, and food processors. This is in line with the research of Chevalier et al. (2003) and MacDonald (2000) who show reduced prices for groceries. Different reasons for this (maybe at first sight) surprising result have been discussed. Warner and Barsky (1995) argue that due to higher economies of scale in price search during periods of high demand it pays-off for consumers to search more for lower prices before Christmas. The demand elasticity for each retailer is thus higher and this reduces prices. Another reason for lower prices might be a higher incentive for firms to deviate from tacit collusion during periods of high demand (Rotemberg and Saloner 1986). Nevo and Hatzitaskos (2006) estimate brand level demand for groceries, finding more price sensitive demand and changed brand preferences during periods of high demand. Consumers switch to cheaper brands and this reduces average prices. In some countries a popular belief (or rather fear) is that gas prices increase before long weekends or holidays such as Christmas as the increase in holiday travel increases demand for gasoline.1 Is this true for Christmas time? Again, in contrast to the belief, researchers could not to show a price increase before Christmas in the US, Canada, or Australia.2 In one market where one would not have expected it, a price increase before Christmas has been clearly established. In countries celebrating Christmas, stock prices increase in the days before Christmas.3 This particular price increase might be a surprise, at least for economists believing in Fama’s (1970) ‘Efficient Market Hypothesis’, according to which abnormal returns on predetermined occasions such as Christmas cannot exist, as the knowledge of that this effect exists should be sufficient for all rational investors to exploit this effect, so that it eventually disappears. But Chong et al. (2005) show that the Christmas effect declined in the US stock market over the last three decades of the twentieth century. In the long run, this pre-Christmas stock market effect might disappear.
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