One of my brothers recently joked that he would like to meet the person who issued the gift cards in the first place. Who would have thought that consumers would be willing to make their money Underneath is it useful?
This is an important question for economists as well. Carl Menger’s famous book At the Origin of Money he argues that money could come from outside the government because people naturally traded to get more “tradable” things.
Menger’s “marketability” is very similar to our word “fluidity”. A high-selling item can easily be sold at any time without a price reduction. The house, for example, doesn’t sell very well, because it can take months to find a good buyer, as compared to Girl Scout cookies, which have a much wider appeal—even children can sell them.
Because it is difficult to find someone willing to barter exactly for what you want, Menger argued that people trade in order to obtain more tradable goods, which they can then use in exchange. Over time, the best-selling items became natural currency.
If people tend to trade up to get more merchandise, why would they ever buy a gift card? This is the basic intuition behind my brother’s joke. If gift cards can only be used for certain products, doesn’t that mean they don’t sell well?
Yes, people don’t always trade because they want more sales. I might happily hand over cash for a chocolate bar, even though I know I’m losing the sale. I have other reasons for wanting to buy chocolate. But in the case of gift cards, the consumer is still buying something that is intended to be used as money. Many people buy gift cards with the hope that they will be used. Why, then, would there be a need to be a Underneath money for sale? Does this contradict Menger’s understanding?
Another possible answer is that the buyer may have his own judgment about what the recipient should buy. The reduced sales itself may be considered a good thing. For example, a man I knew always kept $100 McDonald’s gift cards in his wallet to give to homeless people he met. He kept gift cards, not Benjamins, because he hoped the gift card would be too difficult to exchange for drugs. She couldn’t always carry food with her, so gift cards filled the monetary aspect of transportation without sacrificing her ability to choose what the recipient ate.
But if your grandma buys you a $50 Amazon gift card, I highly doubt she’s trying to get you off drugs. In many cases, people buy gift cards because they want to fulfill the recipient’s interests. So how come gift cards are so popular?
The main factor in this would be habits. It is common for people to give children cash as a gift in all cultures. But when we get older, gifts of money are less acceptable. Consideration is especially important in gift giving when seniors have the means to buy things for themselves. Otherwise, adults will just trade money back and forth.
These norms act as a barrier to the variety of gifts that an adult can give to another. If I want to give my friend $20, I have to spend my time researching what my friend wants so I can buy it for him. Even if I know him well, I can get it wrong, even if I don’t spend $20 the way he would.
This is where gift cards get interesting: when customs prohibit giving cash, actually buying a gift card increase sale of my $20.
Think of it this way. If I plan to give my friend something that costs $20, I might buy her two Yankee Candles, or a new book, or a bouquet of flowers at the grocery store. But whatever I give him he accepts. My $20 will be locked into a physical gift with limited resale value. If I buy a $20 gift card from Target instead, I lose my twenty US dollars in sales, but my gift becomes More it can be sold to its recipient. My friend will have a much easier time trading in a $20 gift card for an economy rate than trying to trade in Yankee candles.
But what about the norms surrounding gifts of money to seniors? Gift cards work well for some of the objections. Instead of trading cash, when two adults give each other gift cards, each of them ends up with something different than before. A gift card is less specific, which means it’s less expensive than cash, but it also means it meets lower discretionary requirements. Perhaps it’s a small consideration, but gift recipients seem to enjoy sales too much to resist.
So the next time you buy a gift card for a friend, don’t think Carl Menger is rolling in his grave. The $1.24 billion gift card market is exactly the kind of phenomenon he was talking about.
