Christmas: The most inefficient time of the year

Wanted: Elderly bearded man spreading inefficiency

Economists are famous for disagreeing but we do have one common enemy. He dresses all in red. He rides a sleigh pulled by reindeer. Every year, without fail, he gives presents to children across the world. Father Christmas, Santa Claus, Saint Nicholas. To the economist he spreads one thing and one thing only. Inefficiency.

As I write this families across the country are facing the post Christmas hangover. Turkey eaten, presents unwrapped, annoying relatives thankfully departed. It is at this time that we all look at the gifts we have received and wonder what we are going to do with them. There’s a jumper from an aunt that I’m never realistically going to wear, an economics book from an uncle that I already had and lots of socks from Santa.

This leads to an obvious conclusion: Christmas is inefficient. Really inefficient. Economics teaches us that buyers will only buy a product if they think it is worth the price they have to pay. This simple principle ensures that providing we are well enough informed we buy products that we want at a price we are prepared to pay.

At Christmas time, all this changes. Gift givers, be they aunts, uncles or Santa himself, make the decision for us. So my aunt handed over £25 for the jumper, my uncle coughed up £9.99 for the economics book and Santa paid around £6 for all those socks. The gift givers decide if they think the product is worth the price. But what do I, and more generally gift receivers everywhere, think of the gifts we receive?

I wouldn’t have bought the jumper at all so its value to me is effectively zero. I probably would have parted with around 50p for the book as having a second copy could be useful. £2 is usually my limit for spending on socks. This isn’t just true for me; in the vast majority of cases the value that people place on the gifts they receive is lower than the price paid for them. So the book seller received £9.99 from my well intentioned uncle, yet the book’s value to me is only 50p. There is therefore a deadweight loss of £9.49.

Consider this multiplied: at Christmas time almost everyone in the UK exchanges gifts. Some gifts will be winners of course, but the general trend will be gifts that the receivers do not value at the price the gift giver paid. Christmas is therefore a hugely inefficient holiday. Far from being the most wonderful time of the year, Christmas produces such huge waste as to make the state look positively thrifty.

Isn’t this all a bit “bah, humbug”?

There is a common argument to this case against gift giving. People like giving gifts, and people like receiving them. It’s not for nothing that Christmas is most people’s favourite holiday. So even though I would never have bought the jumper myself, the fact that my aunt picked it out for me means that its worth to me is increased. I might wear it around the house a few times. But even when we consider this idea of “sentimental value”, which is very hard to measure, we are still left with the reality that giving gifts is inefficient.

For retailers, at first glance all this gift giving is truly magical. The holiday season is the most profitable time of year for almost every retailer. However, at about this time every year all retailers face a similar problem. Some receivers of gifts hold them in such low esteem that even given their “sentimental value” they decide to return them. Returns are a huge problem for retailers like Amazon who must pay for the product to be repackaged and shipped off again to a new customer. This process could hardly be described as efficient.

The problem of returns is so costly for Amazon that they have quietly filed a patent that attempts to address the whole Christmas gift giving problem. The patent details a way for people to return gifts before they even receive them. This new idea, if implemented, could change the way we exchange gifts, saving Amazon money and making Christmas much more efficient.

The detail included in the patent indicates that Amazon is taking this very seriously. There is an option to convert all gifts from a specific person into gift certificates. To quote Amazon directly: “For example, the user may specify such a rule because the user believes that this potential sender has different tastes than the user.” The most exciting – or Scrooge-like – part of Amazon’s plans (depending on your own opinion) is an option to send a thank you note for the original gift even if it has been converted into a gift certificate.

Whilst I’m sure many will argue that Amazon is taking the joy out of Christmas (the Emily Post Institute has already come out with a pretty animated response, claiming that the idea “totally misses the spirit of gift giving”) the fact remains that this will reduce inefficiency. Whilst it may take some time for gift givers and receivers to get used to this new way of exchanging gifts I believe that this represents the future for Christmas. Receiving or giving a gift at Christmas is always nice, but if retailers like Amazon can work towards a way to make it nice and efficient then Christmas may truly become the most wonderful time of the year.

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