Consumers' quality choices during demand peaks

Recognition Program

Authors: Helena Perrone

International Journal of Industrial Organization, Vol. 44, 154-162, January, 2016

In a number of product categories, average prices decrease when demand exogenously increases. The literature disagrees on whether this effect is due to firms' reactions to high demand or to changes in consumer behavior. I propose a strategy that enables the identification of supply and demand movements by examining unpredictable and short-lived exogenous demand shocks. During these periods, firms do not have time to adjust pricing or advertising strategies, and most activity comes from changes in consumer behavior. My model shows that during periods of exogenous high demand, consumers migrate toward cheaper, lower-quality products. I focus on ice cream purchases, which have a seasonal peak during the summer and increase during less-predictable periods of unseasonably high temperatures. Using individual-level data, I test model implications and estimate structural parameters, finding evidence consistent with consumers' quality shifts. I also reject alternative supply-side theories' explanations for the main drivers of the observed price dynamics.

This paper is acknowledged by the Barcelona GSE Research Recognition Program