Valentine's Economics!!!

Sometimes a relationship could really equal money when it comes to giving the right gifts at the right moment. With the Valentine’s Day being just around the corner, the $1.13-billion rose market can be of interest to some economists. A recent article by the Forbes magazine explores the complexities of this market including the distribution process, costs incurred, and pricing strategies.

Initially, one might believe that rose sellers practice price discrimination during this peak season. Indeed, the price of roses increases during Valentine’s week, hopping from $12 to $100 a dozen!!! As the main source for roses sold in U.S., Columbian labor costs only $1.59 per hour. When the Columbians are exporting their roses at less than 50 cents per stem, how are the retailers justified in selling roses at such a high price?

There are several factors that must be considered before accusing the rose sellers of intertemporal price discrimination. First, one should carefully analyze the costs in the rose market including maintenance and shipping. As the author mentioned, the rose industry has a complex supply chain. When moving from one stage to the next, the roses need to be watered, refrigerated and delivered. These variable costs can be significant. Having to squeeze their profit margin 90 percent of the year, the rose retailers are forced to price higher during this season.

In ECON 101, we learned that when demand increases, price increases as well. It is estimated that Americans will buy 189 million roses on Valentine’s Day. Any rational seller will definitely raise the price. So where is the catch? If the price increase is way out of proportion with the increase in demand, we might suspect that sellers have ulterior motives in mind. Without crunching the numbers, however, we can not say anything for sure.

Okay, let’s assume the sellers’ price according to their costs, future losses, and the increase in demand. How would they extract extra from consumers? Well, one way is by bundling roses with teddy bears or some sort of low-cost add-ons and charging it at an appealing price level. Perhaps they could also have some premium packages in their selection to distinguish the rich brats from regular customers.

So if you think roses are too expensive for you, I would suggest picking up some DIY skills. After all, loving someone incurs a price! Ačiū.

By Jim Baltz, Wooi Yang Chang, and Brian Gavron