Consumer Search, Price Promotions, and Counter-Cyclic Pricing

Price promotions and countercyclical pricing are driven by consumer search. This explanation is tested using a dynamic, structural, and seasonal inventory model. Previous studies have found that increases in price promotions lead decreases in the average price of seasonal goods in high-demand seasons, countering basic supply and demand predictions. I explain this phenomenon by proposing that price-sensitive consumers are less likely to search in low-demand periods, changing consumer composition and decreasing aggregate price elasticity. Simultaneously, consumer searches allow the firm to use price promotions to attract price-sensitive consumers while maintaining high average prices. I test this and other explanations using a seasonal dynamic structural inventory model where consumers make decisions on whether to search, which reveals price promotions and allows consumers to purchase. I find that price-sensitive consumers make up 14.9% of searching consumers in the low-demand season versus 29% in the high-demand season, resulting in increased price elasticity. The results suggest that consumer composition is changing due to the different search incentives of different segments.