Truck and Barter: Christmas Deadweight Loss: Objectively Better Gifts?

December 30, 2004

Christmas Deadweight Loss: Objectively Better Gifts?

By Ian

Not sure why I didn't bring this up earlier, and now I've decided to make it a whole post rather than just a tack-on to the original post below.

Take a look at SwapAGift.com, and click on a few of the swaps-a-lot merchandisers. You'll see a list of current cards available and at what price they can be purchased.

Could the difference between the value on the card and the price the card finally sells for serve as a measure of approximate loss on this kind of gift? For instance, on a Pottery Barn card, the approximately $8.50 average difference between actual card value and price it can be bought for might be a valuation for the difference between the monetary value laid out by the purchaser and the receiver's value -- a decent portion of the deadweight loss. Further, one might start to strarify this according to merchandiser type: compare a weighted average difference between stored value and buy prices (weighted according to average size of card to account for the kind of goods, like comparing Tiffany's versus Target, as well as the number of cards sold to take some measure of the volume of trade) to see where losses are greater or lesser relative to some standard such as cash. Those closer to cash's value might be the "better" gifts since they tend to exhibit relatively less loss (on this one measure) than others.

Of course, this kind of thing always raises more questions. Is this difference driven by trends, such as higher demands for electronics one year, home furnishings or jewelry the next? Does the distribution of stores impact the desireability of certain categories, as it might be easier to get to stores that are closer by? What about the effect of income levels? Rural vs. urban?

Or maybe I just need to lie down.

Posted at December 30, 2004 04:30 PM

Comments

Ian,

First, good blog. Interesting to me in particular given my passion (education) in economics and markets. Will continue stopping by if that's okay?

Second, your questions on valuation are interesting and insightful. When we created this market, we started seeing trends that determined the spread between original value and sale price. There are several factors in play: merchant presence (# of outlets), merchandising breadth (cross stitching store vs. electronics), perception of merchandies quality (staple vs luxury). All of these determine the number of cards offered for sale, as well as the valuation.

Since we also act as market specialists by buying gift cards directly and reselling them ourselves (and assuming risk), we account for these factors and more to determine the bid and ask prices for these cards. It's a first hand lesson in market liquidity.

In some respects, we perform gift card arbitrage - esp. given the geographical disparities. We will be adding new features to our site in the next couple of months that will automate execution of this.

I'd welcome further discussion, input, criticism, thoughts.

Comment by Mike K at January 1, 2005 09:40 AM | Permalink

Mike -- thanks for stopping by, and of course frequent visits (and commentary) are always welcome.

If you ever feel like sharing data on the transactions minus personal information, I'd be fascinated to see it.

Out of curiosity, and if you do stop by, how did you end up finding this site? A search for mentions, traffic log, etc? Just wondering.

Comment by Ian at January 3, 2005 09:38 AM | Permalink

Ian, googled or yahooed our name - not sure with the sleep deprivation going these days, and it appeared. Saw this and would have stopped in regardless. Enjoy all discussion on markets/economics.

Some additional insight...

First, our cash for your card option provides immediate market liquidity in major merchant cards. We also buy from lesser-known merchants, at a bigger discount. This is all liquidity driven.

Second, hundreds of people a month mail these cards in for immediate cash, without ever meeting us. So, the market is being seen as legitimate and credible - again, two extremely important characteristics of successful markets.

As trends become more prominent, I'll share findings. If someone would like to determine trends, I'd welcome that as well. I think correlation analysis would be an interesting start.

Mike K

Comment by Mike K at January 3, 2005 07:16 PM | Permalink

Mike -- as a survivor of the .Com bust myself, I'm glad to hear this is going well so far. Seems like a good idea to me. Though, so do internet cosulting, so what do I know?

Didn't mean to sound like I was prying for info. Just that I'm always fascinated by rooting around in data. Correlation, variance in amounts by numerous factors, spread differences both within and across industry, etc and so on. Could all be interesting.

I've always wondered why companies don't trade cards among their affiliate stores. I can't even use my Banana Republic Card at the Gap. Is there a good reason walls still exist between these companies, or should we expect them to end soon?

Comment by Ian at January 3, 2005 10:09 PM | Permalink

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Comment by saddle club at March 19, 2005 01:51 PM | Permalink