Department stores almost always have sales and clearances. These clearances may present themselves broadly as some kind of promotion, like “30% off all shirts,” or “everything up to 40% off!”; or, they may appear as simple tag-price changes. Many interpret these discounts as deception; stores want you to think you’re getting a sale, when in reality, everything is priced normally. Any mother worth her salt will remark that sales are not indicative of saving anything, because sales are the natural state of things. The implication, then, is that companies are tricking you into purchasing an item by making it appear as if you’re saving money. But we shouldn’t be so hasty in drawing this conclusion.
It’s easy to discount unseemly items as market ills, but sometimes looks can be deceiving. In approaching this phenomenon, I begin with a question that every economist is familiar with: what is the incentive? That is, how do companies actually benefit from engaging in constant clearance sales? The implied answer that folks often derive is that these clearances increase sales. But how could that be true if we all knew about the deception? Further, why would any company gain sales when its customers believe the company to be predatory and conniving? We should expect that deception is not rewarding, yet clearances somehow are, as indicated by their persistence.
Perhaps deception is not the true motive. After all, if you’re even aware of this issue, clearly you weren’t deceived. Many people aren’t. So, we should ask: what problem does this phenomenon solve? For any action to occur spontaneously and so frequently, we should expect that it (successfully) resolves issues for the actors. What issue could be solved by frequently marking items cheaper? Changing prices is something most companies would do frequently if it were costless, but menu costs prohibit this behavior. It’s often too expensive for businesses to give on-the-spot valuations for all their goods, all the time; price tags are attempts at fixing this issue, but even then it’s often expensive to change prices for reasons both physical (changing tags) and mental (deciding what prices should be). Clearances are an easy way to change the prices of items without the hassle of printing new tags.
This explains why there are “always” clearances. To reduce costs, companies will produce tags with the highest possible price; that way, any potential price can be set by a clearance, and not the production of a new tag. For instance, I may expect my shirt to typically sell at $7. But I may want to increase the price in seasons of high demand. So, I tag the shirt at $10, and mark it as 30% off on typical days. A change in price would only require that I stamp stickers on tags or put one 30% off sign above a pile of clothes. What looks like predatory pricing is actually just my method of price-changing in a cost-effective manner.
Also remember that price changes are not inherently “predatory.” If demand increases (or supply decreases) and firms raise tag prices, their incentives are aligned with yours. They want more money, and you want their goods. Should they not raise prices, their goods may sell out before you’ve the opportunity to purchase them. If firms increase prices from equilibrium without an increase in demand (or decrease in supply), they lose sales. Any attempt at an “exploitatively” high price would not benefit firms anyways.
As a side note, menu costs are lower for online retail, yet clearances persist there, too. This may seem to disprove my hypothesis, as these clearances persist regardless of menu costs. However, it makes complete sense that websites would still employ clearances. It behooves chains to maintain consistent prices in-store and online, not just for customer satisfaction but for contractual obligations as well. Clearances online allow for original prices to be displayed while also changing the de facto buying price. It may also behoove online retailers to show discounts (in lieu of simply changing prices) simply to show good will to customers. It may mean nothing to most of us (who know that discounts are par for the course), but it could entice the marginal buyer. There can be multiple reasons for clearance sales, all I’m proposing is the unlikelihood of deception being a leading factor.
On a last note, some may question why tags must be priced high and discounted lower, rather than priced lower and marked up later. For example, why don’t stores price an item at $50 and produce signs/tags that read “+ 20%”? Perhaps menu costs explain why prices are frequently changed, but menu costs don’t explain the direction of the price change. It’d be easy to say that at least this is deception, because making a shirt “on sale” for $7 sounds better than marking a shirt up from $5. There is probably some truth there, but I’d posit that discounts are simply easier for customers to understand. If a $50 shirt is 20% off, it’s not hard to figure out that it’s now $40. But saying a $30 shirt is 33% more expensive just sounds more difficult to calculate, doesn’t it.
Sam Branthoover is an economics PhD student at George Mason University.
READER COMMENTS
Fazal Majid
Jul 23 2023 at 3:23pm
Ron Johnson joined Apple from Target and turned the Apple Stores into a retail juggernaut even more profitable per square foot than Tiffany. He then became CEO of J.C. Penney and tried to replace the constant sales with everyday low prices. The results were catastrophic, customers left in droves and the company eventually filed for bankruptcy. So there is some evidence that customers do in fact buy bargains (or the illusion thereof) as much as actual products.
MarkW
Jul 24 2023 at 8:35am
A lot of sales are price discrimination, with price-sensitive consumers carefully watching for sales periods and jumping on opportunities (or waiting in actual lines out the door). Wealthier, less price-sensitive shoppers don’t both with this as their time is more valuable than the potential savings.
And, BTW, sellers sometimes do have a standard price on the tag and then add on extra charges in times of high demand. This is quite commonly done by car dealers who will add on additional ‘market adjustment’ charges when particular vehicles are in short supply. We also see it in the restaurant industry. Recommended tip percentages keep rising, and some restaurants have started adding on other fees above and beyond the stated menu prices. And then there is Uber ‘surge pricing’.
steve
Jul 24 2023 at 9:17am
Of course they deceive. Some people seeing through the deception doesn’t mean everyone does. People still fall for the Nigerian Prince scam and it still amazes me that people really believed that the IRS was going to jail them unless they paid off their debt to them in I-Tune cards. You can say it’s a convenient or lazy deception, but it’s still deception. It would be just as easy to put up a sing saying all shirts $7 or all shirts $10 and leave off any reference to a sale.
Steve
Jon Murphy
Jul 24 2023 at 10:48am
So what, exactly, is the deception you see here? It seems weird to analogize clearance sales to online scams, especially when you don’t identify the deception taking place.
robc
Jul 24 2023 at 11:44am
It could see two possible deceptions, but neither is the one steve sees.
One, if the shirt was originally sold for $7, then “raised to $10” for the sole purpose of selling it 30% off at $7. I have seen this happen at going out of business sales, but not really anytime else.
The other is if the shirt is never offered at the original $10, then it isn’t really a 30% off sale. But from what I have seen, retailers will sell for a short time at full price before discounting.
steve
Jul 24 2023 at 1:57pm
As described, the store plans to sell the shirt at $7. Actual quote follows.
“For instance, I may expect my shirt to typically sell at $7. ”
The store, as described raises the price to $10 during periods of high demand. So the $7 price is not a sales price but the normal price. They charge extra when its high demand season. To be clear, I have no issue with charging more when demand is high, but it’s clearly deceptive to call the $7 price a sale. You could easily price change without trying to claim it is a sale. I also totally understand that a store would not want to be honest and say they are increasing the price during high demand periods because lots of people want them but the tactic of claiming that is its regular price and its on sale the rest of the year would be more accepted, but its also deceptive.
Steve
Jon Murphy
Jul 24 2023 at 2:05pm
I’m still not seeing the deception.
robc
Jul 24 2023 at 5:53pm
I am not either, because “high demand” for clothing is almost always immediately after the product is released, so it starts at that price, then as the season changes, it goes on sale.
MarkW
Jul 25 2023 at 9:48am
” it’s clearly deceptive to call the $7 price a sale”
Would customers really be happier if their $7 purchase was called ‘normal’ and the $10 price they didn’t bite on was called ‘high demand’? Would their buying behavior change? Would they become savvier shoppers? How guileless and child-like do you think ordinary, lower-income, coupon-clipping, sales-flyer scanning people are in spending their scarce, hard-earned money? Telling Kohl’s shoppers that those 15% off coupons are really just ordinary ways of doing business and not ‘special deals’ would surprise and shock approximately none of them.
You have to consider, too, that people are often willing participants in low-cost, harmless deceptions. They like it if 36 waist jeans are marked as 34 or size 14 dresses are tagged as size 12, so that they can fool themselves that they’re slimmer than they are (just as they like stores with slimming mirrors in the dressing rooms). They would not like to know the results of blind tests that revealed that the shampoos in fancy bottles with a long list of exotic ingredients left their hair just the same as if they’d used as ordinary soap. Part of what vendors are selling (and what buyers are actively seeking out and willing buying) are, in part, shared illusions (of quality, of uniqueness, of bargain prices). This process is part of being human and is not something people need to be protected from.
Dylan
Jul 25 2023 at 3:35pm
This is apparently common practice on Amazon and other online sites to raise prices right before a big sale in order to inflate the sales price.
Here is a paper detailing the practice
https://pubsonline.informs.org/doi/10.1287/mksc.2022.1402
I’m with MarkW that this practice is deceptive, but only with the cooperation of the consumers that are often willingly deceived. Getting something for “40% off” makes us feel like savvy consumers and can make a person overall happier with their purchase while increasing sales for the retailer.
steve
Jul 25 2023 at 7:26pm
Jon- They label the $7 price as a sales price. Its not.
Steve
Jon Murphy
Jul 24 2023 at 10:50am
Good stuff. Oppotunity cost also plays in here: fashions change and, to prepare for a new line, stores have to get rid of the old stuff first. In New England, where we have 4 distinct seasons, you always see the clearance sales of whatever was full-priced at the beginning of the season. Nobody buys bathing suits in April, but rather September.
Kurtis
Jul 29 2023 at 3:04pm
Good stuff. My guess for clearance explanation: 80% price discrimination, 5-10% menu-cost saving, ≈5% deception–the remainder being actual sales to clear inventory.
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