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yeah, I think this basically makes sense Nick.

Adam: thanks. I wasn't sure. And couldn't quite do the math to prove it. Though anybody with halfway decent math could take my model, assume a distribution F(P,W), and solve for the elasticities in the two markets.

Nick, what's interesting, though, is that even though the sale might appear random to you, it probably isn't. School supplies predictably come on sale in August/September when demand is very high - which seems at first glance to be counter-intuitive. I stocked up on baking supplies about 3 or 4 weeks ago when they were all on sale - just at the start of the pre-Christmas baking binge. I'd be willing to bet that a fairly small fraction of sales events are, in fact, truly random sales.

This doesn't mean that your model is wrong - in fact, putting baking supplies on sale a few weeks before Christmas might be the optimal way of getting a type 2 shopper like me to buy stuff. I'd be reluctant to buy, say, bulk chopped pecans in February, because they don't keep perfectly, and there's limited room in my freezer. But if they come on sale 8 weeks before Christmas, and I know I'll be making a big double-batch of nanaimo bars for holiday parties some time in the next couple of months.

Mmmm.... Nanaimo bars....

Stephen, the best part is the recipe, which requires one to "chill" on three different occasions - done most effectively on the sofa with an injection of "liquidity"

Frances: Why do turkeys always seem to be cheaper just before Christmas and Thansgiving? Yep, it's counter-intuitive, if you start from the standard competitive equilibrium demand and supply curve. I think (not sure) there's an existing literature on this. One theory is economies of scale in production and/or distribution, so the MC curve slopes down. The second theory is that each store's elasticity of demand is higher when a lot of people are buying turkeys, and are all looking for the store with the lowest price, so the markup of price over MC is smaller (since MR is close to P when elasticity is high). Both these theories assume monopolistic competition (as does mine).

But none of the standard theories seemed to work for a lot of durable goods (e.g. tools) that seem to go on special at Canadian Tire. Go into Canadian Tire on any day, and you can always find some tools that are deeply discounted, while other tools are at the regular price. Go back a week later, and it's different tools. Socket sets and impact wrenches aren't deeply seasonal items (OK, maybe impact wrenches when it's time to put on Winter Tires, but that doesn't explain last week's special). And you often see one socket set on special, and a different socket set at the regular price.

What I can't decide is how much this works for grocery store specials as well. There are things you *know* you will need, but don't need quite yet. Like your examples. So the elasticity of demand should be the same early as late. But maybe early shoppers will be visiting other stores before they need them, while last minute shoppers won't have time, so you get the different demand elasticities that way. But that's not really an option value, because there's no uncertainty.

Wait, I don't think anything in Nick's model implied that sales are *only* put on randomly.

Surely there are many that are set for other reasons. Nonetheless I thought Nick had a point in that a certain amount of randomness can facilitate price discrimination.

The idea is to optimize the arrival rate/duration of the sales so as to capture case 2 without the frequency of case 3 getting to high. Like always there's a trade-off, more case 2 sales at the cost of more occurances of 3, so you try to find the optimum.

How much of increased money demand is due to a similar real option argument? Roughly volatility is up, so options worth more so don't squander them.

Fmb: My guess is "quite a lot". But I can't really put any sort of number on it. Here's an old post I did on the topic: http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/07/cash-as-the-real-real-option-to-do-anything.html

Thanks, just read that post.

Now I'm wondering if there's a possible "Increasing vol bound" where increasing the money supply increases Vol which influences money demand enough to sop up the new supply. If so, loosening might have no net impact on equilibrium.

Considering the current spread of opinions about the effects of QE, this seems at least superficially plausible.

This may not be relevant to spanners, but often sales are related to stock management upstream from the retailer at the manufacturer. If the manufacturer has old stock it wants to clear out, it can offer that to a retailer on a heavily discounted basis. Watch for a new model in the near future.

Random positive stimulation causes bargain hunters to search Can Tire for deals. This gets them in store more often. More often than stores which have regular prices that are lower on average but not lower on sale. And they (we) buy things we'll never use.

On the other hand, many people are not bargain hunters and like to shop at stores that are reliably reasonable (Walmart? at least it matches the image they project). Bargain hunting is a lot of work and may well not pay off.

It surely matters whether a put-off sale is likely to go to the same store or not. Unless the store is short-sighted and cares way more about a sale this month rather than next month.

Another effect: an ad for a sale price is more interesting than an ad for a regular price.

On balance, the effects seem more psychological than economic.

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