Wednesday, November 20, 2013

Why are turkey prices 9% lower when demand is highest?

The NY Times explains the debate among economists who worry about such things:

The most intuitive and popular explanation for a high-demand price dip is that retailers are selling “loss leaders.” Stores advertise very low prices — sometimes even lower than they paid their wholesalers — for big-ticket, attention-grabbing products in order to get people in the door, in the hope that they buy lots of other stuff. You might get your turkey for a song, but then you also buy potatoes, cranberries and pies at the same supermarket — all at regular (or higher) markups. Likewise, Macy’s offers a big discount on select TVs on Friday, which will ideally entice shoppers to come in and buy clothes, gifts and other Christmas knickknacks on that frenzy-fueled trip.

When you price complementary products (chapter 12) it makes sense to reduce the price.  An alternate explanation is from the demand side:

Consumers might get more price-sensitive during periods of peak demand and do more comparison-shopping, so stores have to drop their prices if they want to capture sales. Perhaps, during the holidays, the composition of consumers changes; maybe only rich people or people who really love turkey buy it in July, but just about everybody — including lower-income, price sensitive shoppers — buys it in November. Or maybe everyone becomes more price-sensitive in November because they’re cooking for a lot of other people, not just their nuclear families. 
“People are a little less picky about what they’re buying for other people,” explains Judith Chevalier, an economics professor at the Yale School of Management. “Let’s say I prefer Coke over Pepsi. If I’m buying for myself, I’ll probably buy Coke even if it’s more expensive. But if I’m buying soda for a party, I have no reason to think everyone else also prefers Coke, so I’ll go with whichever brand is cheaper.”

If turkey demand becomes more price elastic around Thanksgiving then we know that it makes sense to reduce price (Chapter 6).  A related explanation is that prices dont change, but rather the more price sensitive consumers substitute toward the cheaper brands. 
 One paper looking at canned-tuna prices argued that this kind of brand substitution was the primary case for an overall decline in price during Lent. It turns out that the cheapest tuna brands aren’t significantly discounted during Lent, but because the cheap brands temporarily accounted for a much higher share of overall sales, they dragged down the average price of a can of tuna.

HT:  Sam

6 comments:

  1. On that note, just as shopping seems to get crazy around the holidays, so does the pricing scheme for businesses. We wanted to see the lights exhibition at Opryland Gaylord, and being Prof. Froeb's econ student, I knew Gaylord was not going to offer me a free show of lights. So I called the place to ask how much they charge for parking - $20 to self park and $28 valet! Plus, the path into the hotel is so long-winded that most people once inside probably decide to pay since they made it all the way there and getting out would be a hassle. What nice complementary pricing - free lights and jacked up parking. Only thing that makes you give in - toddler twins on a cold 29 degree night - we ended up paying valet:/

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  2. One could argue that only high value customers in most cases would be willing to pay the high parking/valet fees - the pricing thereby mostly attracting customers who will be more likely to stay and purchase other things (rooms, food, gifts, tickets, etc.). It deters the "lookie loos" who only want to come and see the hotel but not purchase anything else. Rather mercenary, I guess, but they ARE in business to make money!

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  3. Same could be said for avocados before the superbowl but not for roses before valentine's day. That's probably because roses have to be harvested and shipped very quickly before the holiday. They can't be frozen a month in advance like a turkey can.

    And this is all assuming that the reported price of turkeys is accurate. The American Farm Bureau has an incentive to fudge the reported price of a turkey dinner to be lower than it actually is to encourage sales. After all, the AFB's customers are farmers and turkey producers who gobble up profits during Thanksgiving.

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  4. As a marketer and consumer, I have always held with fascination the pricing of items in a grocery store – holiday turkey pricing being one of them. I have compared out of season (outside of Thanksgiving) pricing with holiday pricing of turkeys. What I’ve found over time is that pricing of whole turkeys remains relatively stable throughout the year. However, during the holiday season, less expensive turkey brands make their way into the market in larger numbers and at less cost in comparison to premium brands like Purdue or Butterball. These alternatives to the premium brands do not appear much outside of Thanksgiving – and when they do appear, it looks like they are “on sale” compared to the premium brands that are right next to them. More often than not I find the least expensive offering during the holidays is the private label (store branded) turkeys.

    So I am firmly settled on the fact that the least expensive brands account for the higher share of overall sales of turkey and – as your blog noted – lowers the average price of turkey during that time.

    There’s another interesting play on holiday turkeys but it has a clearer end game. This is where the grocer offers a “free” turkey with a minimum purchase amount garnered during a certain period of time. For example, my local grocery stores will give me a “free” turkey at the point my total purchases meet a minimum of $400 in a period of a few months. Of course, I’m fairly certain I paid for that turkey but I always make sure I get it anyway!

    Dave Dirks

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  5. This is a classic example of promotional pricing. As noted, it is the time of year when there is a spike in demand. All turkey brands are in the market to get their supply sold so they promote pricing discounts making demand more price elastic ;therefore, reducing prices. It seems that they could sell the turkeys at premium prices; however, some consumers are sensitive to price so they might flock to alternatives such as hams, porks, etc. If the turkey suppliers bring prices down, they will ultimately increase demand and purchase for their turkeys. Since it is a competitive environment around Thanksgiving, most suppliers are lower price to increase purchase volume.

    Jackie Yee

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  6. I dare say the question is simpler than most would like to believe: supply and demand. For example, look at the cut-flower market. Throughout the year, people purchase their flowers from florists or a few on-line stores (who use local florists!). However, on Mother's Day and Valentine's Day neighborhoods are flooded with flower sales at firehouses and vans parked along public roads at every turn. Although the demand may spike, an enormous number of uneducated suppliers flood the market for a one-day killing. More often than not, the intense competition and enormous supply may be greater than that (temporarily) spiked demand, thereby actually lowering prices.

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