How do retail prices adjust to seasonal demand peaks, and what factors influence these changes? originally appeared on Quora, the place to gain and share knowledge, empowering people to learn from others and better understand the world.

If you were planning a trip for these winter holidays, you may have noticed that the airfares are higher than usual, as they are during holidays compared to the other times of the year for the same destinations. This makes sense because a lot more people want to travel on winter holidays, increasing the demand for air travel, which in turn increases the prices of air tickets. What you may not have noticed is that the ice cream in summer was less expensive than it is now during the winter season. More people want ice cream in summers and yet it’s cheaper in summers when the demand is high but more expensive in winters when the demand is low. So, the question is why airfares and ice cream prices behave differently?

The answer lies in the unique dynamics of the composition of the consumer base. In the ice cream market, you can categorize the consumer based into two groups on a high level: A) those who consume ice cream all year round, B) those who mainly consume it during summer. The year-round ice cream lovers tend to be less price sensitive, while the seasonal consumers are more responsive to price changes. So, when summer arrives, and the pool of buyers expands with price-sensitive consumers, it becomes advantageous for retailers to lower prices.

Similar to ice cream, canned soups have the same consumer base dynamics. Canned soup demand peaks during the colder months, yet it's cheaper to buy in winter. The consumer base for soups also comprises year-round consumers and seasonal shoppers, with the latter being more sensitive to prices. Thus, during winter, it's beneficial for retailers to offer discounts and attract this larger, price-conscious consumer group.

When it comes to lowering prices on ice creams, soups, and other similar consumer goods, rarely do retailers alter the actual prices. They instead manipulate the depth and frequency of discounts. This means that in summer, ice cream might be discounted more heavily and frequently, while canned soup sees similar promotional adjustments in winter. Additionally, it's unusual to see price discrimination based on flavors within the same brand and size. The reasons for this remain unclear in my research, but promotions seem to be a tool for price discrimination, especially as seasonal shoppers are more drawn to these offers.

Here is a figure showing the extensive margin (aka seasonal consumers) accounts for most of the seasonal variation in demand. It shows that on average 88% of the shoppers across all common consumer categories are price sensitive to seasonal changes. Extensive margin share was estimated using the household-level information in Nielsen’s Consumer Panel.

Comparing ice cream and soup with other products like fruits and baby milk, the seasonality of fruits and milk etc. is more muted, and their prices don't fluctuate as drastically. In the figure below, you will see that the change in price versus change in quantity over the seasons (change from peak to trough) is more pronounced for ice cream than for baby milk. With the increase in demand quantity for ice cream, there is a negative change in price for ice cream i.e. it became cheaper. With the 20% increase in demand for baby milk, the price increased by 5%. However, for the ice cream, with an above 60% increase in demand, the price decreased by about 15%.

Furthermore, compared to the leisure industry where consumers are willing to splurge on infrequent indulgences, the grocery industry operates differently. In a supermarket, customers often buy multiple products, leading some retailers to employ a 'loss leader' or door-buster strategy. They might lure you in with discounted ice cream, hoping you'll also buy full-priced eggs. The effectiveness of this strategy for retailers is also not yet fully understood due to the challenges of conducting an empirical study.

In conclusion, retail prices respond to seasonal demand peaks in more complex ways. The interplay between consumer price sensitivity for different consumer groups, the use of discounts, and potential 'loss leader' strategies all contribute to this complex pattern. Understanding these factors offers valuable insights into retail pricing strategies that my collaborators and I continue to study.

Reference research paper:

Butters, R. and Sacks, Daniel W. and Seo, Boyoung, Why Do Retail Prices Fall During Seasonal Demand Peaks? (February 18, 2022). 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

This question originally appeared on Quora.

Photo Credit: Image Credit/Unsplash