Counter-Cyclical Price Promotion: Capturing Seasonal Category Expansion under Endogenous Consumption
Authors:
Minjung Kwon,
Assistant Professor of Marketing,
Whitman School of Management,
Syracuse University
Tülin Erdem, New York University
Masakazu Ishihara, New York University.
Journal:
Quantitative Marketing and Economics (2023)
Summary:
This paper shows that seasonal demand spikes increase price elasticity for storable goods due to consumer stockpiling and endogenous consumption, explaining why firms offer more discounts in high-demand periods (counter-cyclical price promotion) rather than low-demand ones.
Research Questions:
1. Why do firms offer more price promotions during high-demand seasons?
2. What consumer behaviors explain counter-cyclical price elasticity?
3. How do seasonal changes in price elasticity amplify price promotions’ effectiveness?
What we Know:
Counter-cyclical pricing (more discounts in high-demand seasons) is well-documented but traditionally explained through aggregate mechanisms like consumer heterogeneity (e.g., seasonal buyers are price-sensitive; Bayot & Caminade 2015) or supply-side strategies (e.g., loss leaders; Lal & Matutes 1994). However, firms lack clarity on why individual consumers become more responsive to promotions during peak seasons, while researchers seek micro-foundations for pricing dynamics. Our work addresses this by pinpointing individual-level behaviors—stockpiling and endogenous consumption—that reshape elasticity.
Novel Findings:
We provide the first evidence that forward-looking consumer behaviors—not just aggregate demand shifts—drive counter-cyclical pricing. Key innovations:
- Mechanisms: Show stockpiling (accelerated purchases) and endogenous consumption (flexible usage) independently raise elasticity in high-demand periods.
- Method: A dynamic inventory model isolates these effects, controlling for consumer heterogeneity.
- Theoretical Shift: Unlike explanations based on consumer heterogeneity—where seasonal demand shifts are attributed to changes in buyer composition—our framework demonstrates that even existing consumers exhibit greater price sensitivity due to stockpiling and endogenous consumption.
Implications for Practice:
This research demonstrates that price promotions are most effective during high-demand seasons for storable goods, as consumers’ stockpiling behavior and flexible consumption patterns make them more price-sensitive in these periods. Firms should reevaluate traditional promotion timing—rather than reserving discounts for low-demand periods, they can achieve stronger results by aligning temporary price cuts with peak seasons when elasticity is higher. These findings are particularly relevant for categories like canned goods, beverages, and other frequently purchased storable products where inventory dynamics and consumption flexibility influence purchasing decisions.
Full Citation:
Kwon, M., Erdem, T. & Ishihara, M. Counter-cyclical price promotion: Capturing seasonal changes in stockpiling and endogenous consumption. Quant Mark Econ 21, 437–492 (2023). https://doi.org/10.1007/s11129-023-09269-6
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.
Web URL for the Article:
https://link.springer.com/article/10.1007/s11129-023-09269-6