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Freakonomics in the Times Magazine: Gift-Card Economy

In their Jan. 7, 2007, column for the New York Times Magazine, Dubner and Levitt ask the question we’ve all been asking: What do a gym membership, a bottle of prescription pills, and a holiday gift card have in common?

This blog post supplies additional research material.

Click here to read the column and here to comment.

According to “Paying Not to Go to the Gym,” a paper by Stefano DellaVigna and Ulrike Malmendier, people overestimate how much they will use their gym membership by more than 70 percent. Many people determine an annual membership to be the better value when the data show that for the majority, it is clearly not.

People who are prescribed self-administered medications take less than half their prescribed doses, according to a 2006 report by the Cochrane Collaboration.

Part of the reason gift cards often go unused is that they expire. The Federal Reserve Board is trying to stiffen regulations on pre-paid products. This Fed Roundtable Discussion gives a nice history of “stored-value products” as well as some ideas that might improve the gift-card experience for the consumer.

In his famous (for economics) paper “The Deadweight Loss of Christmas,” Joel Waldfogel examines the inefficiency of non-cash gifts, finding that most gifts lose between 10 and 30 percent of their value in the exchange.

It’s no wonder, given the results of this paper by Davy Lerouge and Luk Warlop. They provide strong evidence that familiarity with the recipient can actually impede a giver’s ability to give something the recipient actually wants.

Another paper by Joel Waldfogel comes to a similar conclusion: consumers’ own purchases generate between 10 and 18 percent more value, per dollar spent, than items received as gifts.

Here is Best Buy’s Annual Report for 2006, where you will find (on page 65) the gift-card “breakage” income–the industry’s term for card value that was bought but never redeemed–that the company reported for 2006: $43 million ($16 million generated in 2006 alone).

This Wired article reports on the web business, where you can trade a gift certificate from Victoria’s Secret, for example, for one from WalMart.

And finally, here’s a fun Excel sheet that shows you the discount that various gift cards have recently sold for on eBay.