Economists choose their words carefully. The need to buy a large number of gifts does not necessarily translate into an increased demand—a willingness to pay higher prices. One factor here is that there is a tremendous potential for substation among many different gift possibilities. In some cases, one’s children might have asked for a very specific toy, but in other cases, a DVD, a book, or a shirt may all be suitable gift ideas for a given individual. For off-holiday shopping, opportunities for substitution are much less.
In addition, there is a fundamental change in the nature of the market during the holidays. Because of the intense competition among retailers, there is an increasing pressure to focus on volumes of sales rather than margins on each sale. Given what a retailer expects about the competitive strategy of its competitors, it seems to be better off making a lot of sales that each carry a small margin rather than attempting to make larger margins on what will likely be very limited volumes. U.S. public policy strongly favors competition among firms with laws prohibiting sellers from colluding with each other to maintain higher prices. With the sheer number of competitors in the U.S. retail market, is also doubtful that that collusion could actually be maintained even if not prohibited by law.
The trend toward heavy discounting has further been fueled by the practice of “category killers” such as Best Buy, Stapes, Office Depot, and the Sports Authority to commit early to very large volume purchases from manufacturers in return for very low prices. This means that the category killers can offer truly exceptional deals on select items. The customer can get whatever brand and model that he or she wants at a good price, but if he or she is willing to go for one of these “special buys,” a truly exceptional or “killer” deal can often be had.
It should be noted that much of the holiday merchandise will decline dramatically in value after the holidays, further creating an incentive for retailers to heavily discount if sales run behind expectations.