Why turkey prices drop at Thanksgiving — when the demand is highest
JUANA SUMMERS, HOST:
For many people, Thanksgiving is about family, friends, good food and, of course, gratitude. But for our Planet Money team, Thanksgiving also offers a case study for how the laws of supply and demand can work in counterintuitive ways. Erika Beras and Jeff Guo are here to explain.
ERIKA BERAS, BYLINE: Call it the turkey pricing mystery. Every year around the holidays, turkey demand goes up 750%. But turkey prices - they actually fall by about 20%.
XIAO DONG: And that's really surprising in a lot of ways...
JEFF GUO, BYLINE: Xiao Dong is a former economist for the U.S. Department of Agriculture.
DONG: ...Because if you really think there's a lot of demand for a certain thing, that price of that product or thing should be really high.
BERAS: With turkeys, it's the opposite. Demand goes up, but prices go down. Economists call this phenomenon countercyclical pricing, and Xiao says it's actually more common than you might think.
GUO: For instance, the price of champagne - it drops right around New Year's. The price of canned tuna goes down during Lent. And avocados - they get discounted right around Cinco de Mayo. Economists have even noticed countercyclical pricing for ice cream during the summer and soup during the winter.
BERAS: And Xiao walked us through three ways that economists have tried to explain countercyclical pricing. No. 1 is the loss-leader theory.
DONG: A store can discount a popular item, such as turkeys during Thanksgiving, to draw in more consumers, and then they would buy a cartful or basketful of products, too. So that's the loss-leader theory.
BERAS: Does that hold weight?
DONG: That is a empirical question that a lot of economists have been trying to answer.
GUO: Xiao says, yeah, it could be that some stores are using turkeys as loss-leaders - discounting them to draw in customers. Because it's really just the retail price of turkey - the price that stores charge us - that goes down during the holidays. The wholesale price of turkey - the price that stores pay for their turkeys - that actually goes up this time of year.
BERAS: Now, Xiao says there's a second way economists explain countercyclical pricing - by looking at what's going on with customers. This is the price sensitivity theory. The idea is that, around the holidays, the demand for Turkey might be special. All the people buying turkey during Thanksgiving might be very price sensitive, meaning they're willing to shop around. They're going to flock to whatever store offers the lowest price on turkey.
DONG: So because they're more price sensitive, stores will lower their prices a little bit high.
GUO: Right. Basically, if stores don't lower their prices, they might lose out on a lot of these price-sensitive turkey shoppers.
BERAS: And there are lots of reasons why people who buy turkey during Thanksgiving might be more price sensitive. Like, maybe they don't really care about turkey. They only buy it once a year for the sake of tradition, so they just want the cheapest turkey they can find. Or maybe we've all just been conditioned to expect turkeys to be on sale every year.
GUO: Xiao says those two theories about countercyclical pricing could explain the turkey pricing mystery, but he recently came up with his own theory to add to the list.
DONG: One day, I was shopping. It was, like, in July. So I actually asked the store manager - I was like, do you have whole-bird turkeys? He was like, no, that's only a holiday season thing for us, so...
GUO: Yeah, whole turkeys - they're basically, let's call them, a hyperseasonal food. Demand for whole turkeys is low for most of the year, and then it just skyrockets during the holidays.
BERAS: And economists have noticed that in some industries, time of high demand can attract more competition. Xiao thinks turkeys are an extreme example of this, where a lot of stores can swoop in during the holiday season.
DONG: These stores can just, you know, free up some freezer space and start offering turkeys 'cause it's probably profitable to do so. And if there's more stores that come in, that puts downward competitive pressure on prices.
GUO: We're going to call this Xiao's hyperseasonal competition theory - that prices for turkeys fall during the holidays in part because competition between stores heats up during the holidays. And to confirm this theory, Xiao analyzed data from more than 5,000 grocery stores - dozens of chains all across the country. And he found that, during the holiday season, 16% more stores start selling turkey.
BERAS: Which might not sound like a lot, but that can be more than enough to create extra competition and drive down prices.
DONG: So I think it's a complementary theory. As one of my economist friends says, this is probably, like, an economic hot take of what is going on - supported by some data.
BERAS: We love it. Economic hot takes - another thing we at Planet Money are thankful for this Thanksgiving. Erika Beras.
GUO: Jeff Guo, NPR News. Transcript provided by NPR, Copyright NPR.
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