Prices and Supply Disruptions During Natural Disasters

Working Paper: NBER ID: w19474

Authors: Alberto Cavallo; Eduardo Cavallo; Roberto Rigobon

Abstract: We study the daily behavior of supermarket prices and product availability following two recent natural disasters: the 2010 earthquake in Chile and the 2011 earthquake in Japan. In both cases there was an immediate and persistent effect on product availability. The number of goods available for sale fell 32% in Chile and 17% in Japan from the day of the disaster to its lowest point, which occurred 61 and 18 days after the earthquakes, respectively. Product availability recovered slowly, and a significant share of goods remained out of stock after six months. By contrast, prices were relatively stable and did not increase for months after the earthquakes, even for goods that were experiencing severe stockouts. These trends are present at all levels of aggregation, but appear strongly in non-perishable goods and emergency products. Our findings shed light into the determinants of sticky prices in conditions where traditional adjustment costs are less important. In particular, we look at the frequency and magnitudes of price changes in both countries and find that the results in Chile are consistent with pricing models where retailers have fear of "customer anger". In Japan, by contrast, the evidence suggests a bigger role for supply disruptions that restricted the ability of retailers to re-stock goods after the earthquake.

Keywords: natural disasters; prices; supply disruptions; price stickiness

JEL Codes: E20; E30; O57; Q54

Causal Claims

Cause	Effect
2010 earthquake in Chile (N96)	reduction in product availability (L15)
2011 earthquake in Japan (F69)	reduction in product availability (L15)
reduction in product availability (L15)	stability in prices (E31)
2010 earthquake in Chile (N96)	frequency of price changes decreases (E30)
2011 earthquake in Japan (F69)	supply disruptions limit retailers' ability to restock (L81)