Why Don't Prices Rise During Periods of Peak Demand? Evidence from Scanner Data

TLDR

Models emphasizing cyclical demand elasticities or firm conduct are inconsistent with our findings. We analyze retail and wholesale prices of a large supermarket chain over 7½ years. Prices fall on average during seasonal demand peaks, driven mainly by reduced retail margins, a pattern consistent with loss‑leader competition and largely independent of manufacturer behavior.

Abstract

We examine retail and wholesale prices for a large supermarket chain over seven and one-half years. We find that prices fall on average during seasonal demand peaks for a product, largely due to changes in retail margins. Retail margins for specific goods fall during peak demand periods for that good, even if these periods do not coincide with aggregate demand peaks for the retailer. This is consistent with “loss-leader” models of retailer competition. Models stressing cyclical demand elasticities or cyclical firm conduct are less consistent with our findings. Manufacturer behavior plays a limited role in the countercyclicality of prices.