It’s that most wonderful (economic) time of the year!  Spurred on by commercials, newspaper inserts, e-mails, not to mention this year’s controversial Thanksgiving Day shopping kick-offs, customers flood retail stores and light up web browsers in droves.  As economists, we consider this an experiment in transaction costs.

Transaction costs are costs incurred when making an economic exchange.  They include not only the price of an item, but all related costs – i.e., search costs for determining the exact item you want to buy and which stores sell it, and the costs of going to a store to do actual transactions.  [Hey this is serious stuff!  In 1991, Ronald Coase won the Nobel Prize for his work related to the importance of transaction costs to the economy.]  Consumers’ decision to purchase either in-store or online reflects which shopping method offers the lowest transaction costs.  So how do we as economic consultants look at this through the holiday prism?

Initially, it’s not obvious which method of collecting holiday delights may win out for any given Santa. In-store shopping has the obvious advantage of allowing consumers to preview goods in-person before purchasing. The elimination of travel to and from retail stores and added stress makes online shopping a tantalizing option to consumers – especially those who prefer to avoid Black Friday mall shopping-competitions.  

Another advantage of internet retailing is its ability to meet the customer wants through the use of stored data.  Kayak.com chairman and Travelocity founder Terry Jones described the omnipresent role of internet technology in retail: “People shop online.  They look online to get the information they’ll need when they go to the store.  They use a mobile device to get yet more information while they’re in the store….  The old four-P matrix – product, place, price, and promotion – has changed to add a fifth P, personal.”  [We secretly believe Jones is a top economic expert in hiding!]

So, which shopping method lowers these transaction costs the most?  Black Friday and Cyber Monday consumer spending rates provide some insight.  Both broke records in 2011, even in a bleak economy.  Black Friday sales finished at $11.4 billion, a 6.6% increase from last year,  while Cyber Monday internet sales reached $1.25 billion, scoring a 22% gain from last year. These statistics indicate consumers have widely embraced internet shopping, whether as a substitute or supplement to traditional shopping.

Surely the pre-dawn, long lines of customers – those willing to sacrifice Thanksgiving dinner and wait outside a big-box retailer for drastic sales – attest to the lure and longevity of in-person shopping.  Black Friday shopping may be an American ritual, but Cyber Monday is gaining popularity.  But for economic experts, every year our best gift is the chance to analyze these trends and make sense of them for you!  Happy holidays, Team Edgeworth.