Weekend Economists Silent Night Christmas Eve 2014

[Demeter]

4. Christmas Economics: Challenging Some Common Beliefs By Laura Birg

http://www.voxeu.org/article/christmas-economics-challenging-some-common-beliefs

By Laura Birg, Postdoc, Center for European, Governance and Economic Development Research, University of Goettingen and Anna Goeddeke, Professor of Microeconomics and Quantitative Methods, ESB Business School, Reutlingen. Originally published at VoxEU

Christmas may be not so merry as we hope. Economists have argued that gift giving is an inefficient way to allocate resources, and it is widely suggested that Christmas brings a peak in prices and the number of suicides, or even disrupts the business cycle. This column discusses some conventional wisdom about Christmas and shows that economic research in fact runs counter to some of these 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. 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.

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. 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.

Do You Believe That the Number of Suicides Peaks Before Christmas?

Another common belief is that holiday joy and cheer amplify loneliness and hopelessness and therefore increase suicide rates. Another reason discussed is that high expectations during the holiday season could only be disappointed and thereby cause suicides. In a literature review, Carley (2004) shows that empirical research points again in the opposite direction – fewer people commit suicide at Christmas. However, the number of people committing suicide increases subsequently at New Year.

Nevertheless, there seem to be other reasons why Christmas can be life threatening to all of us. The homicide rate increases in the US. In addition, a hospital emergency department visit might be especially dangerous at Christmas time. As Phillips et al. (2010) show for the US, the number of people dying in hospital increases at Christmas and New Year. Similar findings have been established for the UK by Keatinge and Donaldson (2005), although Milne (2005) cannot find such an increase in death rates. The reasons for this increase in death, according to Phillips, do not seem to be the excitement for Christmas but rather overcrowded emergency departments.

Do you Think That the Monetary Value of Presents You are Giving to Your Beloved is of Importance?

In his seminal paper, Waldfogel (1993) discusses whether Christmas entails a welfare loss due to Christmas presents that the receivers do not value as high as givers thought. A lively debate arose amongst economists about the right ways to measure this possible welfare loss, resulting in some researchers showing a welfare gain and others confirming Waldfogel’s welfare loss.6 Even if the discussion on the welfare effect of Christmas is ongoing, some institutional settings should be discussed to solve (potential) welfare loss – Flynn and Adams (2009) show that givers systematically overestimate the importance of the present’s monetary value to the gift-recipient. One solution to this possible welfare problem might therefore be to opt for more humble Christmas presents.

Giving cash would be another economically efficient, but socially inappropriate solution. Therefore gift cards may represent an intermediate between in-kind presents and cash (Offenberg 2007, Principe and Eisenhauer 2009). Offenberg (2007) also finds a welfare loss of 10% for gift cards, as measured by the difference between the face-value of a gift card and the willingness-to-accept –that is the resell price on eBay. So, as long as gift cards also do not seem to be the right solution, humble presents or a wish-list might be an economically reasonable way to reduce a potential welfare loss.

Do You Believe That at Christmas Time the Economy Peaks?

If microeconomic research suggests that Christmas could incur a welfare loss, from a macroeconomic point of view, it might still be a good thing because it “leads to more people working, but faced with a surge of demand, managers somehow manage to get everyone to work smarter and more efficiently even as the total number of workers grows”.

Several macroeconomists have tested for a so called ‘Santa Claus Effect’ in business cycles, that is, a boom in the fourth quarter and a following trough in the first quarter. Overall the results are mixed, with some papers finding this effect, while others could not – or only in some countries – establish a ‘Santa Claus Effect’. More interesting than the question of whether Santa establishes a business cycle is whether such an increase in output and employment in the fourth quarter followed by a contraction the following first quarter is economically efficient. Reliable research results on the effects of Christmas on growth are very limited. Maybe the government should smooth the business cycle and decrease spending in the fourth quarter, while increasing spending in the remaining three quarters. In this way, there could be a bit of Christmas every day.

HONEST TO CHRISTMAS, I COULDN'T TELL IF THIS WAS TONGUE IN CHEEK, OR NOT!