Why don't prices rise during periods of peak demand? Evidence from scanner data

Abstract We examine the retail prices and wholesale prices of a large supermarket chain in Chicago over seven and one-half years. We show that prices tend to fall during the seasonal demand peak for a product and that changes in retail margins account for most of those price changes. Moreover, we find that retails margins are reduced during peak periods of demand for specific goods even if these peak periods do not coincide with peaks in aggregate demand. We also observe that these retail margin cuts are frequently accompanied by price advertising. This is consistent with "loss leader" models model of retailer pricing and advertising competition. The economies of scale in search explanation of Warner and Barsky(1995) and the models of cyclical firm conduct by Rotemberg and Saloner (1986) are less consistent with retailer behavior. Manufacturer behavior plays a limited role in the counter-cyclicality of prices.