In 1994 you couldn't buy one of those plastic retail gift cards with magnetic strips to track the balance of the gift. The Mobil Oil Company sold the first ones in 1995.
Jennifer Pate Offenberg pulled some research on gift cards from her Ph.D. thesis and reported on the market place in the Spring 2007 Journal of Economic Perspectives (Markets. Gift Cards). Look at how the business has grown:
Retailers love the cards. Offenberg listed the reasons:
- accounting is a lot easier than it used to be with older paper gift certificate
- customers often spend more than the face value of the card when they use them
- an estimated 10% are simply never redeemed
- firms can "manage their reported earnings by manipulating the timing and rate at which unredeemed gift cards are written off from liabilities"
- shoplifting of gift cards isn't an issue, since the value is added at the checkout counter. They can be "placed predominantly at front entrances for prime advertising."
There's some evidence that people who receive gifts often place a lower value on the gift than its price to the person who gives it (the "deadweight loss of Christmas"). Gift givers often give the wrong thing, or give something with the wrong specifications. On the other hand, cash is often perceived as cold and hard, a gift signaling that little or no thought went into it. That's bad if it really is the thought that counts.
Could gift cards offer a middle way? They're not really cash. They could signal that some thought went into the gift. It may be easier for the gift-giver to identify the general category of gift (hardware, clothes, stuff from WalMart) that the recipient would like than to pick the perfect gift. If so, the value the recipient places on the gift might be relatively close to its price.
Offenberg looked at gift card value losses. You may not be aware of it, but you probably won't be surprised, to know there is an active resale market on eBay for unused gift cards. Offenberg studied this market (2,002 completed transactions in gift cards from 31 stores during February-June 2004) and found that, "taking the sales price and the selling costs together, a fair estimate would be that gift cards have a cash value 20 percent lower than their face value to recipients..." She estimates the loss at about $16 billion, given the projected volume of sales in 2007.
She was able to look at discounts for cards from different stores. The five best cards (smallest discount):
- Home Depot
- Office Max
- Circuit City
and the five worst cards (largest discount):
- Tiffany & Co
- Victoria's Secret
- Abercrombie & Fitch
- American Eagle
She also noticed that smaller valued gift cards weren't as well represented in the eBay sales (average gift card prices were about $42, but the average card sold on eBay was about $192. This could be because a gift card for a store, that offsets money the recipient would have spent at the store, frees up money to be spent elsewhere - with no welfare loss. As gift card values increase, the likelihood that they will exceed the amount the recipient would have spent at the store increases, and the potential for a welfare loss also increases.
So what's her advice on the best way to use these cards to get the biggest bang for your gift-giving buck:
The evidence presented here suggests some advice for those considering a gift card. First, givers who are less aware of the recipient’s preferences should rely more on gift cards from general-purpose stores that offer greater product variety like Target or Home Depot, since gift cards from these retailers are less likely to create welfare losses. Second, smaller-valued gift cards are less likely to produce welfare losses than higher-valued gift cards. Finally, for higher-valued gifts and when the gift-giver is imperfectly informed of the recipient’s preferences, a cash gift will generally provide a larger increase in the recipient’s utility than a gift card. Gift-givers planning on giving a gift card might want to bear in mind the possible benefit of a cash gift with a note to the recipient suggesting that the money could be spent at [insert name of store here]—to add the thought that counts.
And if you are the recipient, you should be aware of the eBay option.