Countercyclical Pricing : A Consumer Heterogeneity Explanation

The well documented phenomenon of countercyclical prices goes against intuition as basic economic theory predicts a price increase when there is an outward shift in the demand curve. In this research, we provide a consumer heterogeneity based explanation for why the prices of seasonal products might be falling during their peak demand periods. We derive conditions under which the optimal pricing scheme could be countercyclical due to the heterogeneous seasonal shifts in consumer valuations. The firm exploits this heterogeneity and price discriminates so that only the higher valuation customers are served during the off-season. We consider two product categories (canned soup and tuna) studied in the literature and provide empirical support for this explanation