Why Do Retail Prices Fall During Seasonal Demand Peaks?
64 Pages Posted: 12 Jun 2019 Last revised: 9 Mar 2020
Date Written: March 8, 2020
Examining all widely-sold products in a large, national scanner database, we find that seasonality in demand is large, pervasive across product categories, and heterogeneous in its timing. Yet at seasonal frequencies prices fluctuate little, and typically, countercyclically, falling as demand peaks. A natural explanation for this pattern is that demand becomes more elastic as its level peaks. We find, indeed, that for most seasonal products, demand becomes more elastic when demand levels peak. Quantitatively, the estimated seasonal elasticity changes can roughly rationalize observed countercyclical pricing. A likely mechanism for time-varying elasticities is seasonal shifts in the composition of buyers, as extensive margin responses account for nearly the entirety of seasonal demand shifts.
Keywords: seasonality, countercyclical pricing, demand, price elasticity of demand, optimal pricing
JEL Classification: D40, L11, L81
Suggested Citation: Suggested Citation