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Price Dispersion In U.S. Manufacturing: Implications For The Aggregation Of Products And Firms

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  • Thomas A Abbott III
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    Abstract

    This paper addresses the question of whether products in the U.S. Manufacturing sector sell at a single (common) price, or whether prices vary across producers. Price dispersion is interesting for at least two reasons. First, if output prices vary across producers, standard methods of using industry price deflators lead to errors in measuring real output at the industry, firm, and establishment level which may bias estimates of the production function and productivity growth. Second, price dispersion suggests product heterogeneity which, if consumers do not have identical preferences, could lead to market segmentation and price in excess of marginal cost, thus making the current (competitive) characterization of the Manufacturing sector inappropriate and invalidating many empirical studies. In the course of examining these issues, the paper develops a robust measure of price dispersion as well as new quantitative methods for testing whether observed price differences are the result of differences in product quality. Our results indicate that price dispersion is widespread throughout manufacturing and that for at least one industry, Hydraulic Cement, it is not the result of differences in product quality.

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    File URL: ftp://ftp2.census.gov/ces/wp/1992/CES-WP-92-03.pdf
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    Bibliographic Info

    Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 92-3.

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    Date of creation: Mar 1992
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    Handle: RePEc:cen:wpaper:92-3

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    Keywords: CES; economic; research; micro; data; microdata; chief; economist;

    References

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    1. Pratt, John W & Wise, David A & Zeckhauser, Richard, 1979. "Price Differences in Almost Competitive Markets," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(2), pages 189-211, May.
    2. Dahlby, Bev & West, Douglas S, 1986. "Price Dispersion in an Automobile Insurance Market," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(2), pages 418-38, April.
    3. Perloff, Jeffrey M & Salop, Steven, 1985. "Firm-specific information, product differentiation, and industry equilibrium," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series, Department of Agricultural & Resource Economics, UC Berkeley qt60v9q47r, Department of Agricultural & Resource Economics, UC Berkeley.
    4. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
    5. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 69, pages 213.
    6. Salop, Steven & Stiglitz, Joseph E, 1977. "Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 44(3), pages 493-510, October.
    7. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, Elsevier, vol. 4(2), pages 115-145, May.
    8. Frank R. Lichtenberg & Zvi Griliches, 1986. "Errors of Measurement in Output Deflators," NBER Working Papers 2000, National Bureau of Economic Research, Inc.
    9. Carlton, Dennis W, 1979. "Contracts, Price Rigidity, and Market Equilibrium," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(5), pages 1034-62, October.
    10. Isard, Peter, 1977. "How Far Can We Push the "Law of One Price"?," American Economic Review, American Economic Association, American Economic Association, vol. 67(5), pages 942-48, December.
    11. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, Econometric Society, vol. 51(4), pages 955-69, July.
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    Cited by:
    1. Lucia Foster & John Haltiwanger & Chad Syverson, 2005. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," Working Papers 05-11, Center for Economic Studies, U.S. Census Bureau.
    2. Gu, Wulong & Baldwin, John R., 2004. "Innovation, survie et rendement des etablissements canadiens de fabrication," Serie de documents de recherche sur l'analyse economique (AE) 2004022f, Statistics Canada, Direction des etudes analytiques.
    3. Chad Syverson, 2004. "Market Structure and Productivity: A Concrete Example," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(6), pages 1181-1222, December.
    4. Gu, Wulong & Baldwin, John R., 2004. "Innovation, Survival and Performance of Canadian Manufacturing Plants," Economic Analysis (EA) Research Paper Series 2004022e, Statistics Canada, Analytical Studies Branch.
    5. Gorodnichenko, Yuriy, 2008. "Using Firm Optimization to Evaluate and Estimate Returns to Scale," IZA Discussion Papers 3368, Institute for the Study of Labor (IZA).

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