Temporary Sales and Cyclicality

Abstract

How do temporary markdowns (”sales”) affect aggregate price flexibility? This paper provides novel evidence from U.K. CPI price micro data that sales matter for regular price adjustment over the business cycle. Around 50% of sales occur shortly before or after a regular price increase or decrease, as if these sales were strategically used to mask a regular price hike or draw attention to a regular price cut. These ”strategic sales” are strongly countercyclical, peaking during the Great Recession and the Covid-19 pandemic. Thus, sales seem to be used as a way to implement cyclical regular price changes. This behavior matters on the aggregate: regular price increases (decreases) that are associated with sales contribute up to 13% (11%) to the overall frequency of regular price hikes (drops) and are up to 9% (5.5%) larger in absolute size.