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

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.