What Explains Price Declines in Seasonal Goods Markets? An Empirical Examination
33 Pages Posted: 20 Jan 2019
Date Written: January 10, 2019
Three explanations have been proposed in the literature to describe the reason behind sharp price declines observed over a product's short lifecycle in seasonal (perishable) goods markets: Prices decline as a result of (i) inter-temporal price discrimination; (2) firm's uncertainty about product popularity at the start of the season; (3) decreasing opportunity costs. We first translate these explanations into a set of predictions that can be tested within a unified empirical framework. Then, using two unique data sets from a large US specialty apparel retailer, we examine several cross sectional and time series regularities in the pricing and sales of many different types of products and shopping patterns of many consumers to assess whether these explanations have empirical support in the fashion apparel market. Our results show that rapid decline in opportunity costs within the selling season is the main reason behind the observed price declines, and neither initial uncertainty nor intertemporal price discrimination motives can explain the price patterns in our data. Our empirical estimates show that lower opportunity costs due to higher levels of inventory, shorter time left in the season, or a reduction in storage and shelf space due to new product introductions lead to earlier/deeper markdowns. Our results suggest that seasonal goods retailers might benefit from initiatives that would enable them to better manage their opportunity costs. Our results also suggest that although the retailer is limited in its ability to exercise intertemporal price discrimination, it is possible to leverage the differential price sensitivity of consumers through zone pricing. Future research examining pricing patterns in similar contexts is warranted and can leverage our empirical framework and the battery of tests we propose.
Keywords: Dynamic Pricing, Seasonal Goods, Empirical Testing, Theory Testing
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