Thanks to innovations in technology, measuring holiday spending is easier and faster — and the resulting news stories can influence decisions by retailers and shoppers. The upshot is that both parties behave differently from how they did 20 years ago.
This resembles the principle in physics that measuring some variable can change the variable itself. Economists in the 1800s consciously modeled theories of such human predictability on physics. Supply and demand interacted to produce prices for goods just as gravity and motion hold planets in stable orbits.
Market conditions might have changed — a drought reduced the supply of wheat or new styles increased demand for certain fabrics — but markets subsequently adjusted to a new equilibrium. Outside forces caused changes, but observing or measuring economic activity had no effect then. That no longer is true.
Until recently, there was little real-time data about how much holiday shoppers were spending. Business reporters could interview store managers. Federal Reserve economists could call corporate executives to ask how things were going. But the resulting information was subjective.
The development of fast, cheap computing and telecommunications changed that. Such developments enabled retailers to verify checks and credit card charges before completing a sale. The process, which is almost entirely automated, was instituted to reduce nonpayment risks to merchants — not to generate information about the economy as a whole.
But when a computer processes the amounts of purchases and the vendors, it is simple to tabulate some basic totals. This information makes interesting news. The media report that sales are up or down X percent from the previous year. Retailers always knew how their own businesses were doing, but now they know with some precision what is happening sector-wide.
If their store sales are dragging, especially compared with the rest of the pack, they can aggressively cut prices — even before Christmas. If they are doing well compared with the competition, no discounts are necessary.
Shoppers read the same news. Some accordingly plan when they will make purchases, anticipating whether or not many items will be discounted in the last week or two. No, not everyone does this. Much shopping is driven simply by when people have the time. But at the margin, enough shoppers respond to detailed news about sales to establish a feedback loop that did not exist 20 years ago.
Consumers also follow biological principles explained by Pavlov. If retailers frequently run big sales before Christmas, consumers learn to wait for such sales just as chickens learn to peck a button to get feed. Early season purchases slow, motivating retailers to start discounting. Auto manufacturers similarly are learning that repeated rebates and zero-interest offers train consumers to wait for such promotions before buying.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.