Miao, Chunhui:Why Don’t Prices Rise During Periods of Peak Demand?

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During periods of peak demand, frequent markdowns present an empirical puzzle. Based on the idea that stores faces capacity constraints in times of high shopping volume, we show that stores may want to keep their o¤-season prices high in order to lure all consumers to shop around the same time. This relaxes competition and allows stores to raise prices. Due to binding capacity constraints, stores randomize their prices during periods of peak demand. Thus, our model offers a unified explanation for both the counter-cyclicality and the high frequency of price changes during weekends and holiday periods.

 
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