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Existence and Persistence of Price Dispersion: an Empirical Analysis

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  • Saul Lach

Abstract

Using a unique data set on store-level monthly prices of four homogenous products sold in Israel, I study the existence and characteristics of the dispersion of prices across stores, as well as its persistence over time. I find that price dispersion prevails even after controlling for observed and unobserved product heterogeneity. Moreover, intra-distribution mobility is significant: stores move up and down the cross-sectional price distribution. Thus, consumers cannot learn about stores that consistently post low prices. As a consequence, price dispersion does not disappear and persists over time as predicted by Varian's (1980) model of sales.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8737.

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Date of creation: Jan 2002
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Publication status: published as Lach, Saul. "Existence And Persistence Of Price Dispersion: An Empirical Analysis," Review of Economics and Statistics, 2002, v84(3,Aug), 433-444.
Handle: RePEc:nbr:nberwo:8737

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  1. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 44(3), pages 465-91, October.
  2. Reinganum, Jennifer F, 1979. "A Simple Model of Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(4), pages 851-58, August.
  3. Rothschild, Michael, 1974. "Searching for the Lowest Price When the Distribution of Prices Is Unknown," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(4), pages 689-711, July/Aug..
  4. 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.
  5. Danny Quah, 1992. "Empirical cross-section dynamics in economic growth," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 75, Federal Reserve Bank of Minneapolis.
  6. John McMillan & Peter B. Morgan, 1988. "Price Dispersion, Price Flexibility, and Repeated Purchasing," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 21(4), pages 883-902, November.
  7. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, Elsevier, vol. 3(2), pages 156-168, June.
  8. Lach, Saul & Tsiddon, Daniel, 1996. "Staggering and Synchronization in Price-Setting: Evidence from Multiproduct Firms," American Economic Review, American Economic Association, American Economic Association, vol. 86(5), pages 1175-96, December.
  9. J. Rupert Gatti, 2000. "Equilibrium Price Dispersion with Sequential Search," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 1368, Econometric Society.
  10. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(2), pages 349-89, April.
  11. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, American Economic Association, vol. 70(4), pages 651-59, September.
  12. Rob, Rafael, 1985. "Equilibrium Price Distributions," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(3), pages 487-504, July.
  13. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, Econometric Society, vol. 51(4), pages 955-69, July.
  14. Geweke, John & Marshall, Robert C & Zarkin, Gary A, 1986. "Mobility Indices in Continuous Time Markov Chains," Econometrica, Econometric Society, Econometric Society, vol. 54(6), pages 1407-23, November.
  15. Rajiv Lal & Carmen Matutes, 1989. "Price Competition in Multimarket Duopolies," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 516-537, Winter.
  16. McAfee R. Preston, 1995. "Multiproduct Equilibrium Price Dispersion," Journal of Economic Theory, Elsevier, Elsevier, vol. 67(1), pages 83-105, October.
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