Working Paper: CEPR ID: DP8856
Authors: Giacomo Calzolari; Andrea Ichino; Francesco Manaresi; Viki Nellas
Abstract: We study the entrance in a retail market of consumers who are less elastic because of hurriedness and lack of information. Theory predicts that firms react by increasing prices to expand surplus extraction, but this effect weakens as market competition increases. High frequency data from Italian pharmacies confirm these predictions. Monthly variation in the number of newborns at the city level generates exogenous changes in the number of less elastic buyers (the parents) who consume a basket of hygiene products demanded by more experienced and elastic consumers as well. We estimate that the number of newborns has a positive effect on the equilibrium price even if marginal costs are decreasing. We exploit exogenous variation in market competition generated by the Italian legislation concerning how many pharmacies should operate in a city as a function of the existing population. Using a Regression Discontinuity design we find that an increase in competition has a significant and negative effect on the capacity of sellers to extract surplus from less elastic buyers.
Keywords: Consumers; Information; Demand Elasticity; Pharmacies; Price Competition; Regression Discontinuity
JEL Codes: D43; D83; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in the number of newborns (J13) | increase in the average price for child hygiene products (J13) |
| increase in the number of pharmacies (I11) | decrease in the price elasticity of demand (D12) |
| increase in the number of newborns (J13) | decrease in the price elasticity of demand (D12) |
| increase in competition (L13) | decrease in the ability of sellers to extract surplus (D43) |