Decision Stages and Asymmetries in Regular Retail Price Pass-Through

Abstract

We study the pass-through of wholesale price changes onto regular retail prices using an unusually detailed dataset obtained from a major retailer. We model pass-through as a two-stage decision process that considers both whether and how much to change the regular retail price. We show that pass-through is strongly asymmetric with respect to wholesale price increases versus decreases. Wholesale price increases are passed through to regular retail prices 70% of the time while wholesale price decreases are passed through only 9% of the time. Pass-through is also asymmetric with respect to the magnitude of the wholesale price change, with the magnitude a↵ecting only the response to wholesale price increases but not decreases. Finally, weshow that covariates such as private label versus national brand, ninety-nine cent price endings, and the time since the last wholesale price change have a much stronger impact on the first stage of the decision process (i.e., whether to change the regular retail price) than the second stage (i.e., how much to change the regular retail price).

Not all price endings are created equal: Price points and asymmetric price rigidity

“…The sale price dummies are included as both the drop to a sale price and the bounce-back, likely differ from other price changes. The wholesale price is included since retail price changes is likely to be correlated with it (Anderson et al 2017, McShane et al 2016. We exclude the observations with wholesale price changes of 200% or more.…”

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