[THE VIEW]The Secret Behind Cheaper Ice Cream in Summer

Grocery Prices in the US Move Inversely with Demand
Counter-Cyclical Pricing Phenomenon
Aligned with Corporate Profit Maximization

How is the market price of goods or services determined? According to what is learned in introductory economics, the market price is formed at the point where the demand and supply curves intersect. If demand increases, the demand curve shifts upward, naturally causing the market price to rise. This prediction also makes sense intuitively. When demand increases, it is profitable for companies to set higher prices accordingly.

In the case of airplane tickets, this prediction holds true. As the number of people wanting to use airplanes increases during peak seasons, airfare rises. When demand for houses increases, house prices go up. However, the opposite phenomenon is also observed. In the United States, for groceries or manufactured goods sold in supermarkets, prices actually fall as demand increases. For example, in hot summers, ice cream demand rises, but ice cream prices are lower than in winter. In the U.S., this phenomenon is called counter-cyclical pricing, and it has long been an unresolved mystery in economics. Why do prices fall even as demand increases?

One hypothesis is that prices do not actually fall during peak seasons; rather, because people buy more inexpensive items during peak seasons, the average price appears to drop. However, recent studies using big data have revealed that even for exactly the same product, prices are indeed lower during peak seasons.

Another hypothesis is that tacit collusion among companies is harder to maintain during peak seasons, leading to intensified price competition due to collusion failure. The idea is that during peak seasons, lowering prices below the collusive price allows companies to sell much larger quantities than in off-seasons, making collusion difficult. However, products exhibiting counter-cyclical pricing are already in highly competitive markets even during off-seasons, making collusion difficult from the start. Therefore, this hypothesis also fails to explain the mysterious price fluctuations.

There are various other theories as well. Some argue that, contrary to economic theory, companies may not always maximize profits in reality, and others suggest that products in peak seasons are often used as loss leaders, which could explain lower peak season prices.

Recently, however, empirical research has proposed a new hypothesis. It turns out that consumers buying products during peak seasons can be divided into two groups: one group consists of seasonal consumers who only purchase the product during peak seasons, and the other group consumes the product both in peak and off-seasons. For example, in the summer ice cream market, there are seasonal consumers who eat ice cream only in summer, and consumers who eat ice cream in both summer and winter. The research found that seasonal consumers tend to be price-sensitive, whereas consumers who buy ice cream regardless of season are relatively less sensitive to price. Consumers who eat ice cream even in freezing winter (a kind of Eoljuka) are likely to be true ice cream enthusiasts, willing to pay higher prices and less responsive to price changes.

According to these findings, in off-seasons, only the less price-sensitive so-called Eoljuka remain, but during peak seasons, price-sensitive seasonal consumers flood the market. From the company's perspective, it is actually profitable to lower prices during peak seasons. Therefore, the price drop during peak seasons is a perfectly natural phenomenon that aligns with profit maximization. If this result is correct, then the counter-cyclical pricing phenomenon was never really a mystery.

Seo Boyoung, Professor at Indiana State University, USA