Thursday, September 4, 2014

REPOST: Why are Turkey prices 9% lower at Thanksgiving?

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

3 comments:

  1. The high demand price dip is a selling tactic to get consumers in the door for the purpose to buy that item. Grocery retailers know that to make a full meal the consumer will have to add the additional products to their shopping needs. Where I work we do the same and sell certain products under cost just to get the customers in the door. Taking a loss in selling the product just to have a deal that the consumer will not pass by. This is strategic marketing that will keep the foot traffic in store and out of the competitor's stores.
    Many times many stores will advertise low prices that are unbeatable to entice shoppers to want to shop during that particular sale. They wont forget to mention while supplies last to get the customers in the store. Even if the consumer gets in the store and the particular item is sold out, this gives the store the opportunity to gain sales with other merchandise that may be needed by the customer. Corporations use the demand curve and lower retail costs to get an abundance of shoppers in their doors. Even though the product sold might be inelastic and the price can be raised according to the demand, companies are willing to undersell the competition gaining the price advantage and the extra sales that go with it.

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  2. I find this example fascinating. For big national companies to compete in an intensely competitive market, they really must be deeply immersed in economic decision making. As a consumer, I never realized how dramatically these companies are working to impact my purchasing behavior to their favor. It’s not simply about making a great product and putting it out in the market, streamlining operations, or being on top of marketing and advertising. Decisions on what to sell, how much to sell, and at what price are decisions of incredible magnitude.
    The blog “Why are Turkey prices 9% lower at Thanksgiving?” helps me understand why big department stores will sell a television set way below cost on Black Friday. Demand for consumer goods is off the charts (very elastic) and a lower price will win you the consumer’s choice. Then, once they’re in the door, they will likely buy other things that are marked up, balancing revenues.
    We know from Froeb et al. (2016) that elasticity follows a number of rules. Elasticity (in which a small change in price results in a big change in demand) is higher when a product has a lot of close substitutes. So the more choice the consumer has, the more elastic demand is. During peak buying seasons like the holidays or back-to-school season, for example, not only is demand up, but consumers have lots of options. I can buy school supplies at WalMart, Office Max, Staples, Kmart, Dollar General, and even at the grocery store. Because I have many substitutes in terms of product AND where I shop – and because demand is high – price changes can have a big impact on where consumers buy. The company that wins on price will win more customers.
    But I think the Turkey example speaks to another elasticity rule from Froeb et. al. Products that have many compliments are less elastic. If we relate this to back-to-school shopping, think about Walmart. My child’s school supply list has notebooks, pens, pencils, and all the normal things. But I also have to buy a special calculator, safety goggles, gym shorts, and a box of pins. If a business can offer me a reasonable price (even if it is not the lowest amongst all competitors) but I can buy everything in one place (similar to the “many compliments” example) I will choose them. So I will buy school supplies at WalMart because the price is reasonable and I can get everything, instead of going to Dollar General which is cheaper but I can only buy 1/3 of what I need.

    Froeb, L., & McCann, B. (2016). Managerial economics: A problem solving approach (4th ed.). Mason, OH: South-Western Cengage Learning.

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  3. Turkey prices are 9% lower at Thanksgiving for two main reasons: to get more people into the stores to shop and to get rid of any excess. Most people know that if they wait a few days before Thanksgiving they will get a better price. “By focusing consumers on prices, you make them more sensitive to price differences, which makes demand more elastic. When you make demand more elastic, you want to reduce price to attract more customers” (Froeb, et al., 2016, p. 157). Over the past years during the Thanksgiving holiday, I am certain that I have never gone into a store and walked out with just a turkey. Nine times out of ten, I have walked out with more items than I originally went in to buy. This is what stores want to see. They want consumers to purchase more complementary items at raised prices. Pricing the turkey low is the hook that stores use to get people into the stores to shop. When a consumer pays 9% less on a turkey which is the staple dish at Thanksgiving, they don’t mind spending an extra dollar here and there on other complementary food items. The second reason is that most people seldom buy a turkey after Thanksgiving unless the price is a giveaway. After Thanksgiving, the demand for turkey is low. Therefore, during Thanksgiving, stores try to reach as many elastic demand consumers as possible. "Price elasticity measures the sensitivity of quantity to price" (Froeb, et al., 2016, p.72).

    Froeb, L.M., Shor, M., McCann, B.T. and Ward, M.R. (2016). Managerial economics: A problem solving approach, 4th ed. MA:Cengage Learning.

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