19 Feb 2016

Love sells: the economics of Valentine’s Day

Lauren writes*

The 14th of February is a day feared by both singles and lovebirds. For singles, it’s simply a confirmation of their loveless existence. For couples, it is very stressful, as Valentine’s Day is, to some, the day of the year to decide whether your love is meant to be. However, except for a day to celebrate love, Valentine’s Day is often criticised as a holiday that has become very commercial. According to a survey by the National Retail Foundation, 55% of Americans planned to celebrate Valentine’s Day, and on average to spend $142.46 on it. What causes people to spend such a large amount of money on Valentine’s Day?

A lot of the fuzz around Valentine’s Day has to do with the pressure: does the other person like me or not? Valentine’s Day is the opportunity to show your partner how committed you are to the relationship. According to a survey by Discover, 75% of the people told their partner they did not bother with a gift, 47% would still be presently surprised to receive a gift. Therefore, the market of Valentine’s Day could also be explained as a game in which information asymmetry exists. Both partners could decide to buy a present, which shows their commitment, but does come at high costs. Optimally, neither of them buys a present. This shows that a gift on Valentine’s Day is not a necessity to show commitment in a relationship.

However, this outcome will probably not occur, as the risks are high. If only one person of the couple decides to buy a gift, it’s just plain awkward. Furthermore, the opportunity costs of this outcome are high. It can take months for a person to convince their loved one that he or she really cares about the relationship, which is more effort than this one time investment. Thus, the Market of Valentine has a high rate of uncertainty due to the asymmetric information about the other person’s preferences and romantic intentions. Therefore, consumers tend to go for the safe option of buying their loved ones a gift and show their commitment, but this does come at costs.

Namely, this causes large price inflation for goods on Valentine’s Day. Roses cost 30-50% more. Not only do the prices rise due to high demand, it is also a matter of elasticity. About half of the consumers spend their money on chocolate, and 38% is spend their money on flowers. Luxury goods like these are usually very elastic throughout the year. However, most significant others do not want to risk their relationship, making these goods a “necessity”.** The collective change in preferences for this date makes the goods more inelastic towards the 14th. Companies know this, and change their prices accordingly.

Bottom Line Don't feel miserable as you lay on the couch watching Netflix with your friends Ben & Jerry. Enjoy all the expenses you have saved by avoiding a game that often does not lead to an optimal outcome.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

** DZ adds: More on what men and women expect... and give.


Esmee Hendriksen said...

Great work, Lauren! This is a very well written, fun post to read on a topic we can probably all relate to! What I find particularly interesting about your piece is that you show in a very clear, concise way how a personal interaction in daily life can be explained economically and actually represents an important economic, game theoretical struggle that many people face, and which influences the market.

I agree with you that sometimes the information asymmetry is large, because people are unaware of each other’s romantic intentions. In such a scenario people end up buying a gift, whereas the optimal choice might indeed be not to buy a gift at all. However, a possible (less likely) scenario could also be one in which people would not just be “presently surprised” if they got a gift, but where they would prefer getting one no matter what, and both lovers knew that of one another, for example in a solid relationship. In that scenario, the model changes: the information asymmetry is no longer there, the costs of not buying a gift might become higher than the ones of buying a gift, and it would thus be more beneficial to buy each other a gift after all!

In general, I think that the whole idea behind Valentine’s Day gifts is a great topic for economic analysis, which can take different possible forms, depending on people’s love life. I believe this analysis has a lot to do with people’s psychological characteristics/preferences and the effects of that on consumer behavior, which makes the topic worth analyzing, but at the same time also quite complicated!

Overall, I think your post provides a proper economic analysis, and I will in the future certainly think twice before purchasing a Valentine’s Day gift!

Isabel said...

This is a nice way of looking at Valentines Day from an economic perspective. The facts put forwards in this piece well describe that decisions made on Valentines Day can be explained by both psychological as well as economic theory.

I agree with you on your point regarding the influence of elasticity of demand for Valentines roses on price increases. Elasticity undeniably plays a role in the price increase of roses around Valentines Day, however I believe that we can link the most prominent cause for this rise in price back to the simple theory of supply and demand. This is something that you just briefly mentioned. Suppliers of roses can in the period before February 14th predict an increase in demand of their good. A result of this prediction they will produce more and set higher prices. This higher price is made up of a couple components, be it the simple rational behind more revenue, higher production cost as well as a higher import price because of an increase in world demand in this period.

Thus, although I agree elasticity plays a big role in the price for Valentines gifts or roses, to me it seems the simple theory of supply and demand accounts for a larger portion of the price rise of roses.

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