Working Paper: NBER ID: w21931
Authors: Greg Kaplan; Guido Menzio; Leena Rudanko; Nicholas Trachter
Abstract: We use a large dataset on retail pricing to document that a sizeable portion of the cross-sectional variation in the price at which the same good trades in the same period and in the same market is due to the fact that stores that are, on average, equally expensive set persistently different prices for the same good. We refer to this phenomenon as relative price dispersion. We argue that relative price dispersion stems from sellers' attempts to discriminate between high-valuation buyers who need to make all of their purchases in the same store, and low-valuation buyers who are willing to purchase different items from different stores. We calibrate our theory and show that it is not only consistent with the extent and sources of dispersion in the price that different sellers charge for the same good, but also with the extent and sources of dispersion in the prices that different households pay for the same basket of goods, as well as with the relationship between prices paid and the number of stores visited by different households.
Keywords: price dispersion; retail pricing; equilibrium model; price discrimination
JEL Codes: D40; D83; E31; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| relative price dispersion (D49) | cross-sectional variation in prices (P22) |
| sellers' attempts to discriminate between high-valuation buyers and low-valuation buyers (D40) | relative price dispersion (D49) |
| persistent differences in pricing at stores (L11) | relative price dispersion (D49) |
| number of stores visited by different households (R22) | prices paid (P22) |