Thursday, October 8, 2015

10:13 AM

A recent study shows seasonal consumption and purchase without search may explain counter-cyclic pricing.

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Avery Haviv
When demand for a product increases, the price goes up as well—most of the time.
An exception seems to be seasonal goods, such as beer, cheese, crackers, and tuna, in what is known as counter-cyclic pricing. In a recent paper—“Does Purchase Without Search Explain Counter Cyclic Pricing?”—Simon assistant professor Avery Haviv explores this phenomenon.

He proposes an explanation: Consumers sometimes make purchases without checking prices at the store even in low-demand periods. For example, they might use a shopping list to plan their purchases before their visit, choosing both the variety and quantity of a product before checking out prices at the store.

To test his explanation, Haviv used a dynamic, structural inventory model in which consumers make decisions on whether to search.

The dominant cause of seasonal search, he writes, is seasonal consumption. There are two seasonal changes in consumer incentives to check prices during low-demand periods. In the summer, people buy less soup, and thus the expected savings from finding a cheaper price are lower. Second, the depth of discount is smaller in the summer.

Both of these effects reduce the potential savings resulting from checking prices, and so the customer is more likely to purchase without a price comparison.

On the other hand, comparing prices on soup is more common in the winter because consumers buy more and the sales are bigger, offering a greater discount. Companies might react to this change in search behavior by offering larger discounts in a high-demand season, Haviv notes.
Haviv found that consumers who compare prices search for soup 39 percent of the time in winter, compared with 23 percent in the summer. This causes price elasticities that are more than 64 percent larger in winter than in summer.


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