Behavioural features of the Xmas toy market

In his latest blog, renowned economist Paul Ormerod looks at the perennial issue and problem of popular xmas toys in short supply.

The popular press has recently been full of shock-horror stories about Christmas toys.

There are two consistent themes in these lurid features. First, supply problems may mean that many children will miss out on the most popular toys. Second, prices will be a lot higher than last year.

Many stories combine the two, with retailers being accused of price gouging, of taking advantage of shortages

Reports of both price increases and shortages contain a kernel of truth. There are genuine issues with global supply chains which are not just confined to the UK.

But we have been here before. In fact, we are here almost every Christmas. The most popular toys run into short supply.

Their prices, particularly on sites such as eBay rocket, as parents desperately try to acquire whatever has become the ne plus ultra of the moment for their offspring.

Four years ago, for example, the august pages of the Times carried accusations that so-called Grinch bots were stealing Christmas. The automated bots were buying the most popular toys and then selling them at inflated prices.

A popular gift that year was Fingerlings toy monkeys. Leading retailers ran out of stock completely, and the list price of £14.99 was stratospherically passed on eBay, with deals being struck for £200.

Way back in 2002, the press reported that six of the top ten most wanted toys this year were in short supply, with no prospect of further deliveries from the Far East, where most are still made, that year.

A piece, again in the Times, claimed that this had happened in each of the past seven years.

Indeed, a Google search will readily reveal that these stories have become a feature of Christmas just as traditional as the tree and the pudding. They appear every year.

Each individual year will have aspects of the overall picture which are specific to that year. But the fact that it is a universal feature of the Christmas toy market from year to year suggests that there is a general, underlying explanation.

The key feature of the market for Christmas toys is that demand is not primarily determined by the prices and qualities of the alternatives which are on offer.

What really matters is how popular an item has become. The more popular it is, the greater the demand for it becomes. Every child wants the toy of the moment.

A theoretical model of markets such as these was developed as long ago as 1973 by the polymath and economic Nobel Laureate Thomas Schelling. His paper has the splendid title “Hockey helmets, concealed weapons and daylight saving”. Schelling’s inspiration was a piece in the sports section of a newspaper about ice hockey.

A star player had suffered serious head injuries from the flying puck whilst not wearing a helmet. The reporter interviewed other leading players, none of whom wore helmets. It was clear that they understood the very real dangers involved. But when asked why not, a top boy answered “I don’t because the other guys don’t”.

Schelling crystallised this into a mathematical concept he called “binary choice with externalities”. The choice facing an individual is binary. Either you wear a helmet or you don’t. But your choice affects how other people in your peer group make their choices.

So no need to panic, unless of course you are the parent of a small child, about dire warnings of shortages and price gouging. They are fundamental features of the Christmas toy market, which no amount of either complaining or regulation will change.