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When Little Things Mean a Lot: On the Inefficiency of Item Pricing Laws

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  • Mark Bergen
  • Daniel Levy
  • Sourav Ray
  • Paul Rubin
  • Benjamin Zeliger

Abstract

We study item-pricing laws (which require that each item in a store be individually marked with a price sticker) and examine and quantify their costs and benefits. On the cost side, we argue that item-pricing laws increase the retailers' costs, forcing them to raise prices. We test this prediction using data on retail prices from large supermarket chains in the Tri-State area of New York, New Jersey and Connecticut. The Tri-States offer a unique setting - a natural experiment - to study item-pricing laws because the states vary in their use of item-pricing laws, but otherwise offer similar markets and chains operating in a close proximity to each other in a relatively homogenous socioeconomic environment. We use two datasets, one emphasizing the breadth in coverage across products and the other across stores. We find consistent evidence across products, product categories, stores, chains, states, and sampling periods, that the prices at stores facing item-pricing laws are higher than the prices at stores not facing the item pricing laws by about 25 cents or 9.6 percent per item. We also have data from supermarket chains that would be subject to item-pricing laws but are exempted from item pricing requirement because they use costly electronic shelf label systems. Using this data as a control, we find that the electronic shelf label store prices fall between the item-pricing law and non-item-pricing law store prices: they are lower than the item-pricing law store prices by about 15 cents per item on average, but are higher than the non-item-pricing law store prices by about 10 cents per item on average. On the benefit side, we study the frequency and the magnitude of supermarket pricing errors, which the item-pricing laws are supposed to prevent. We quantify the benefits of the IPLs by conservatively assuming that they successfully accomplish their mission of preventing all price mistakes. Comparing the costs of item-pricing laws to their benefits, we find that the item-pricing law costs are at least an order of magnitude higher than the benefits.

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Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 0404.

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Date of creation: Jun 2004
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Handle: RePEc:emo:wp2003:0404

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