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.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.

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.4 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.5 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”.7

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’.8 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.9 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.

See for bibliography

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16 comments

  1. craazyman

    Wow. I never really thought about any of this, but I know some people can’t help themselves and they obsess over it, so I’ll have to mount a response of some kind. I’m a little busy today, but I’ll get the elves and reindeer together soon and brainstorm on it — I promise. We’ll come up with something. In the meantime, maybe you’ll have a new Ouija Board under the tree tomorrow! No point wasting your life thinking about all this nonsense when you can guess and be wrong just as often as you already are.

    -Santa Claus
    Xmas Factory PO Box 1
    North Pole

    1. James

      Hey Claus old man, several of the car companies down south here, Mercedes and Lexus most notably, have been capitalizing on your image most egregiously this holiday season. I know times are hard, what with the North Pole warming up and everything, but I hope you haven’t sold your collective souls to those capitalist rascals. Me and mine are doing fine this year, so please give us a pass in favor of some of the less fortunate. Sorry for all the bold font old boy. It looks like we’re stuck here again. Cheers!

  2. Llewelyn Moss

    On the theme of Christmas, I found this Bill Moyers article interesting.

    Apparently back in the Communist blacklist 50’s, the govt wackos called out the movie “It’s a Wonderful Life” as Communist propaganda. Because they depicted Mr Potter, the banker, as an evil man — therefore it was an attack on Capitalism. Never underestimate the ideological stupidity of your gifted leaders in government.

    Of course now that the US is a Neoliberal Plutocracy Administered By Fascists, they can allow the public their little indulgences like movies that promote humanity toward man/woman.

    Stick a fork in that frog. Is it boiled yet?

    1. not_me

      Because they depicted Mr Potter, the banker, as an evil man — therefore it was an attack on Capitalism.

      What part of a free market requires government subsidies for the banks? Therefore our banks are fascist and the opposite of fascism is NOT communism.

      It’s quite a double standard to consider attacks on communism for the banks as an endorsement of communism in general.

    2. John Zelnicker

      According to this story, Ayn Rand was on the committee that produced a pamphlet describing the propaganda techniques used by the Hollywood Commies to infiltrate their message into screenplays and films.

      1. jrs

        They probably did. I mean a lot of documents have come out on how there was a lot of Soviet attempts at influence on U.S. society. Then again so did and so do the U.S. intelligence agencies.

      2. sd

        Let me guess. Any Rand wrote a screen play that was rejected in Hollywood so she conspired with Ronald Reagan to blacklist actors, writers, and directors to get back at them.

        Petty little people personally responsible for the destruction of so many lives. That’s karma that will not easily wash away.

  3. SJB

    And maybe, just maybe, businesses understand that they will need to lower prices at Christmas to retain market share, and build this into their pricing for the rest of the year.

    Also, economists doing these studies seem to have forgotten that the people giving the gifts that the recipients don’t fully appreciate, themselves have a gain in welfare by the act of giving to those they love. Ooops! I forgot, fully rational economic man is too selfish to gain welfare from other people’s happiness. I wonder if that is also true for fully rational economic woman? Sounds like an economic research article in the making to me!

    Now I have to get back to wrapping those presents my teenagers won’t appreciate, just because they are teenagers.

  4. susan the other

    This was such an understated, dry little analysis of the ghastliness of christmas it made me smile. But it is nice to know that an objective peek at the facts indicates christmas is as counterproductive as any other pump and dump. (I’m gonna start a faster fast food chain and name it ‘Pump n Dump’. And the ad line will be that it has twice as many restrooms so you don’t have to wait in line for your food or your toilet.) I’m sure lotsa shrinks have noticed how desperate humans are at winter solstice to keep their spirits up, (I for one am totally insane from November to March) so it stands to reason that marketeers have fine tuned this unfortunate weakness. Too bad we can’t market sunshine.

    1. Llewelyn Moss

      It would scare the holy hell out of the retail industry if there was a popular movement to Stop Handing Out Presents as a ritual. Replace it with a Holiday Hug (or similar) instead.

      The United States’ retail industry generated over three trillion U.S. dollars during the holidays in 2013. These holiday sales reflected about 19.2 percent of the retail industries total sales that year.

      1. James

        That would be one tradition that would be easy to get started at the grassroots level. Just quit buying stuff and inform everyone you know that you’ll only be giving and receiving non-monetary gifts. Even the people you know who wouldn’t like it would probably just write you off as cheap and/or poor, which in a lot of cases these days, would be true anyway.

    1. not_me

      It’s hilarious that she wouldn’t worship God but instead worshipped (a few) very fallible and mortal human beings. We, the Living is more accurately, per her own logic, We the soon to be Dead .

      The poor thing. Socialists drove her crazy!

  5. ewmayer

    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.

    Apparently our oh-so-bright economics researchers failed to discuss a glaringly obvious possibility, namely that retailers, having longstanding acquaintance with the kinds of items that are reliable “hot sellers” in the runup to Christmas, ACTUALLY PROCURE AND STOCK HIGHER VOLUMES OF SAID ITEMS. As this 2006 Guardian piece details, manufacturers (mostly in China) are filling outgoing container ships with Xmas-targeted stuff already in late Summer:

    Christmas is coming not in sacks or sleighs this year but on board the biggest ship afloat, on its maiden voyage from China. To the relief of children, parents and shopkeepers everywhere – but to the despair of European manufacturers – mountains of crackers, toys and games as well as decorations, calendars, wrapping paper, food and every imaginable gift are currently steaming past Spain and should reach Felixstowe, Suffolk, on Saturday aboard the vast Emma Maersk 3.

    If anything – perish the thought – should happen to this quarter of a mile long, 200ft-high (61 metre) behemoth, that is as wide as a motorway and is powered by the largest diesel engine ever built, then Christmas might have to be cancelled. The manifest for the 3,000 containers of goods that it will drop off in Britain on its way to mainland Europe reveals the largest single consignment of festive cheer ever delivered – a floating world of British desires and necessities.

    I mean really – ’tis so simple only a trained economist would fail to consider it. The authors even point to this when they write “As long as this is not accompanied by an increase in supply…”, but apparently promptly dismiss this possibility.

  6. LAS

    For about 8-9 weeks before Christmas all the news programs hyped shopping as news. What a turn-off. You’d think they were herding animals through a barnyard procedure.

    This Christmas I didn’t do any retail shopping. Just sent a few online orders and avoided all the rest. It’s been great! What a relief. This is the first year I got away with avoiding it! And it didn’t make me sad. Quite the opposite. There was more time to actually spend with people and that was uplifting.

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