Counter-cyclical price promotion: Capturing seasonal changes in stockpiling and endogenous consumption

Minjung Kwon (), Tülin Erdem and Masakazu Ishihara
Additional contact information
Minjung Kwon: Syracuse University
Tülin Erdem: New York University
Masakazu Ishihara: New York University

Quantitative Marketing and Economics (QME), 2023, vol. 21, issue 4, No 1, 437-492

Abstract: Abstract This paper provides a new and complementary demand-side-oriented explanation for counter-cyclical pricing, which we define as the presence of more frequent price discounts during high-demand seasons than in low-demand seasons in seasonal product categories. Our study focuses on how an increase in marginal utility of consumption in high-demand seasons (resulting in a seasonal upward demand shift) can increase price elasticity in storable and frequently-purchased product categories, where consumers may exhibit forward-looking price expectations and engage in stockpiling and where consumption may be endogenous. We propose that during high-demand periods, a price discount is more likely to increase purchase quantities due to lower satiation of consumption and to increase total consumption which induces category expansion. This leads to higher price elasticity during high-demand periods than during low-demand periods as consumers have forward-looking price expectations and stockpile and/or consumption is endogenous. Thus, we present stockpiling and endogenous consumption as the consumer behavioral mechanisms behind counter-cyclical price elasticity. Unlike most existing studies, our proposed mechanisms capture forward-looking consumers’ dynamic trade-offs created by temporary price reductions and, therefore, shed light on the practice of counter-cyclical price promotion, as opposed to a seasonal change in mean prices. We investigate the roles of stockpiling and endogenous consumption using the framework of a dynamic inventory model with endogenous consumption by allowing consumption utility to be subject to exogenous seasonal fluctuation. Our model indicates that during high-demand periods, demand elasticity increases by 9.63% relative to low-demand periods, offering a motivation for counter-cyclical price promotion. Counterfactual experiments were done to validate the roles of the proposed mechanisms of stockpiling and endogenous consumption, both of which explain counter-cyclical patterns in price elasticity as individually, as well as collectively, when the marginal utility of consumption varies across seasons.

Keywords: Counter-cyclical pricing; Stockpiling; Endogenous consumption; Category expansion; Promotion effects; Seasonal demand; Price expectation (search for similar items in EconPapers)
JEL-codes: C1 C6 D1 D8 M3 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11129-023-09269-6 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:qmktec:v:21:y:2023:i:4:d:10.1007_s11129-023-09269-6

Ordering information: This journal article can be ordered from
http://www.springer. ... ng/journal/11129/PS2

DOI: 10.1007/s11129-023-09269-6

Access Statistics for this article

Quantitative Marketing and Economics (QME) is currently edited by Pradeep Chintagunta

More articles in Quantitative Marketing and Economics (QME) from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().