Why Do Retail Prices Fall During Seasonal Demand Peaks?

Abstract

Examining widely-sold products across dozens of categories in a national scanner database, we find seasonality in demand is large, pervasive, heterogeneous in its timing across categories, and primarily driven by changes in the likelihood of households purchasing any product in the category. At seasonal frequencies, price fluctuations are small and typically countercyclical–for both advertised and non-advertised products. For most categories, demand becomes more elastic as it peaks, because incoming households are more responsive to promotional prices. Thus, countercyclical seasonal pricing patterns can mostly be accounted for by demand-side factors instead of requiring a supply-side explanation (e.g., “loss leader” pricing).

Keywords: seasonality, countercyclical pricing, demand, price elasticity of demand, optimal pricing

JEL Classification: D40, L11, L81