Abstract:Analyzing a large scanner price dataset, we uncover a surprising regularitysmall price increases occur more frequently than small price decreases for price changes of up to 10¢. Furthermore, we find that inflation can explain some of the asymmetry. Inflation, however, offers a partial explanation because substantial proportion of the asymmetry remains unexplained, even after accounting for the inflation. For example, the asymmetry holds also after excluding inflationary periods from the data, and even for products whose price had not increased. The findings hold for different aggregate and disaggregate measures of inflation and also after allowing for lagged price adjustments.JEL Codes: E31; D11; D21; D80; L11; L16; M31
Asymmetric pricing is the phenomenon where prices rise more readily than they fall. We articulate, and provide empirical support for, a theory of asymmetric pricing in wholesale prices. In particular, we show how wholesale prices may be asymmetric in the small but symmetric in the large, when retailers face costs of price adjustments. Such retailers will not adjust prices for small changes in their costs. Upstream manufacturers then see a region of inelastic demand where small wholesale price changes do not translate into commensurate retail price changes. The implication is asymmetric-small wholesale increases are more profitable because manufacturers will not lose customers from higher retail prices; yet, small wholesale decreases are less profitable, because these will not create lower retail prices, hence no extra revenue from greater sales. For larger changes, this asymmetry at wholesale vanishes as the costs of changing prices are compensated by increases in retailers' revenue that result from correspondingly large retail price changes. We first present a formal economic model of a channel with forward looking retailers facing costs of price adjustment to derive the testable propositions. Next, we test these on manufacturer prices in a supermarket scanner dataset to find support for our theory. We discuss the contributions of the results for the asymmetric pricing, distribution channels and cost of price adjustment literatures, and implications for public policy.
We investigate asymmetric price responses by considering a unique, highly disaggregate retailer- and product-level time series at a major supermarket chain. We find asymmetry exists, but is limited in scope and there is no evidence of a pervasive chain wide asymmetric pricing strategy. To explain product level variation, we borrow from both economic and marketing perspectives to suggest menu costs, operational efficiency, competition, and consumer perceptions as important factors. The evidence suggests an efficiency-based rationale for asymmetry. This study complements that of Peltzman (2000. J. Polit. Econ. 108 (3): 466-502.) who found no systematic asymmetry in a study of the same data considered at a more aggregate level. Copyright © 2007 John Wiley & Sons, Ltd.
Item pricing laws (IPLs) require a price tag on every item sold by a retailer. We study IPLs and assess their efficiency by quantifying their costs and comparing them to previously documented benefits. On the cost side, we posit that IPLs should lead to higher prices because they increase the cost of pricing as well as the cost of price adjustment. We test this prediction using data collected from large supermarket chains in the Tri-State area of New York, New Jersey and Connecticut, which offer a unique setting because these states vary in their use of IPLs, but otherwise offer geographical proximity with each other and similar markets, supermarket chains, and socioeconomic environments.We find that IPL store prices are higher by about 20¢-25¢ or 8.0%-9.6% per item on average, in comparison to non-IPL stores. As a control, we use data from stores that are exempt from IPL requirements (because they use electronic shelf labels), and find that their prices fall between IPL and non-IPL store prices. To assess the efficiency of IPLs, we compare these costs to existing measures of the benefits of IPLs which are based on measurements of the frequency and the magnitude of pricing errors the IPLs are supposed to prevent. We find that the costs of IPLs are an order of magnitude higher than the upper bound of these estimate benefits.
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