Why Do Retail Prices Fall During Seasonal Demand Peaks?

64 Pages Posted: 12 Jun 2019 Last revised: 9 Mar 2020

See all articles by R. Andrew Butters

R. Andrew Butters

Indiana University

Daniel W. Sacks

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Boyoung Seo

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Date Written: March 8, 2020

Abstract

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

Butters, R. and Sacks, Daniel W. and Seo, Boyoung, Why Do Retail Prices Fall During Seasonal Demand Peaks? (March 8, 2020). Kelley School of Business Research Paper No. 19-21, Available at SSRN: https://ssrn.com/abstract=3394301 or http://dx.doi.org/10.2139/ssrn.3394301

R. Butters (Contact Author)

Indiana University ( email )

1309 E. Tenth St.
Bloomington, IN 47405
United States

HOME PAGE: http://https://kelley.iu.edu/BEPP/faculty/page14113.cfm?ID=46947

Daniel W. Sacks

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States

Boyoung Seo

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States
812-855-3667 (Phone)

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