Why you should avoid liquidation sales

One of our friends, R., went to the Circuit City in Norman when they announced that they were closing the store (this was before the entire company went bankrupt). He wanted to buy a digital camcorder but found that (a) the "liquidation" price was higher than Amazon's and (b) he had to send it back to the manufacturer if it failed because the liquidation was conducted by someone other than Circuit City. There was no point in buying something at a brick-and-mortar store if he couldn't count on an easy return, so he ended up walking out.

Apparently, the majority of consumers were not as smart:

Circuit City hired professional liquidation services to run the final days of the chain. And somewhat counterintuitively, the first thing the liquidators did was raise prices. Substantially. And it worked. Merchandise flew out of the showroom and the company made some real money in its final moments of existence.

The reasoning actually proves pretty simple: A high-profile closure brings a crush of bargain-hunters. Circuit City was mobbed. Those customers, however, were operating off of a fairly simple theory of why they would get a good deal; Circuit City was going out of business and needed to sell down its stock. But the liquidator had a lot more experience with closures than the customers and so knew full well that the consumers would think they were getting a good deal whether or not they were. And so they in fact got a bad deal.

Liquidation sales, in other words, are typically bad deals.