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Price Dispersion, Search Costs And Consumers And Sellers Heterogeneity In Retail Food Markets

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  • Giovanni Anania

    ()

  • Rosanna Nisticò

    ()
    (Dipartimento di Economia e Statistica, Università della Calabria)

Abstract

Price dispersion, i.e. a homogeneous product sold at different prices by different sellers, is among the most replicated findings in empirical economics. The paper assesses the extent and determinants of spatial price dispersion for 14 perfectly homogeneous food products in more than 400 retailers in a market characterized by the persistence of a large number of relatively small traditional food stores, side by side large supermarkets. The extent of observed price dispersion is quite high, suggesting that monopolistic competition prevails as a result of the heterogeneity of services offered. When prices in an urban area (where the spatial concentration of sellers is much higher and consumer search costs significantly lower) have been compared with those in smaller towns and rural areas, differences in search costs and the potentially higher degree of competition did not yield lower prices; quite the contrary, they were, on average, higher for 11 of the 14 products considered. Supermarkets proved to be often, but not always, less expensive than traditional retailers, although average savings from food shopping at supermarkets were extremely low. Finally, the results of the study suggest that sellers behave differently in their pricing strategies; these differences emerge both at the firm level, and for supermarkets within the same chain. The fact that products considered were homogeneous, purchases frequently repeated, the number of sellers large, and search costs relatively low, did not suffice to keep price dispersion low. From the results presented in the paper, it is clear that what is important in explaining price dispersion is the contemporaneous heterogeneity of retailers (in terms of services) and consumers (in terms of search and shopping preferences), which makes it possible for a monopolistic competition structure of the market to emerge and for small traditional food retailers to remain in business.

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File URL: http://www.ecostat.unical.it/RePEc/WorkingPapers/WP05_2011.pdf
File Function: First version, 2011-05
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Bibliographic Info

Paper provided by Università della Calabria, Dipartimento di Economia, Statistica e Finanza (Ex Dipartimento di Economia e Statistica) in its series Working Papers with number 201105.

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Length: 43 pages
Date of creation: May 2011
Date of revision:
Handle: RePEc:clb:wpaper:201105

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Postal: Università della Calabria, Dipartimento di Economia, Statistica e Finanza, Ponte Pietro Bucci, Cubo 0/C, I-87036 Arcavacata di Rende, CS, Italy
Phone: +39 0984 492413
Fax: +39 0984 492421
Web page: http://www.unical.it/portale/strutture/dipartimenti_240/disesf/
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Related research

Keywords: Price dispersion; Retail pricing; Food markets;

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  1. Clay, Karen & Krishnan, Ramayya & Wolff, Eric, 2001. "Prices and Price Dispersion on the Web: Evidence from the Online Book Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 49(4), pages 521-39, December.
  2. Dahlby, Bev & West, Douglas S, 1986. "Price Dispersion in an Automobile Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 418-38, April.
  3. Berck, Peter & Brown, Jennifer & Perloff, Jeffrey M. & Villas-Boas, Sofia B, 2007. "Sales : tests of theories on causality and timing," CUDARE Working Paper Series 1031, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
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  6. Simon P. Anderson & André de Palma, 2005. "Price Dispersion and Consumer Reservation Prices," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 61-91, 03.
  7. Leibtag, Ephraim S. & Barker, Catherine & Dutko, Paula, 2010. "How Much Lower Are Prices at Discount Stores? An Examination of Retail Food Prices," Economic Research Report 96767, United States Department of Agriculture, Economic Research Service.
  8. Rachel Griffith & Ephraim Leibtag & Andrew Leicester & Aviv Nevo, 2009. "Consumer Shopping Behavior: How Much Do Consumers Save?," Journal of Economic Perspectives, American Economic Association, vol. 23(2), pages 99-120, Spring.
  9. Morgan, Peter & Manning, Richard, 1985. "Optimal Search," Econometrica, Econometric Society, vol. 53(4), pages 923-44, July.
  10. Kathy Baylis & Jeffrey Perloff, 2002. "Price Dispersion on the Internet: Good Firms and Bad Firms," Review of Industrial Organization, Springer, vol. 21(3), pages 305-324, November.
  11. Michael R. Baye & John Morgan & Patrick Scholten, 2006. "Information, Search, and Price Dispersion," Working Papers 2006-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  12. Michael R. Baye & John Morgan, 2001. "Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets," American Economic Review, American Economic Association, vol. 91(3), pages 454-474, June.
  13. Hong, Pilky & McAfee, R. Preston & Nayyar, Ashish, 2002. "Equilibrium Price Dispersion with Consumer Inventories," Journal of Economic Theory, Elsevier, vol. 105(2), pages 503-517, August.
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