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

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Author Info
Bergen, Mark
Levy, Daniel
Ray, Sourav
Rubin, Paul
Zeliger, Ben

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Abstract

Item pricing laws (IPLs) require a price tag on every item sold by a retailer. We study IPLs and assess their efficiency by quantifying their costs and comparing them to previously documented benefits. On the cost side, we posit that IPLs should lead to higher prices because they increase the cost of pricing as well as the cost of price adjustment. We test this prediction using data collected from large supermarket chains in the Tri-State area of New York, New Jersey and Connecticut, which offer a unique setting because these states vary in their use of IPLs, but otherwise offer geographical proximity with each other and similar markets, supermarket chains, and socioeconomic environments. We find that IPL store prices are higher by about 20¢–25¢ or 8.0%–9.6% per item on average, in comparison to non-IPL stores. As a control, we use data from stores that are exempt from IPL requirements (because they use electronic shelf labels), and find that their prices fall between IPL and non-IPL store prices. To assess the efficiency of IPLs, we compare these costs to existing measures of the benefits of IPLs which are based on measurements of the frequency and the magnitude of pricing errors the IPLs are supposed to prevent. We find that the costs of IPLs are an order of magnitude higher than the upper bound of these estimate benefits.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 1158.

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Date of creation: 08 Oct 2006
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Handle: RePEc:pra:mprapa:1158

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Related research
Keywords: Item Pricing Law Cost of Item Pricing Law Cost of Price Adjustment Menu Cost Retail Pricing

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Find related papers by JEL classification:
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
K20 - Law and Economics - - Regulation and Business Law - - - General
L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Patrick Lunnemann & Ladislav Wintr, 2006. "Are internet prices sticky?," Working Paper Series 645, European Central Bank. [Downloadable!]
  2. Patrick Lünnemann & Ladislav Wintr, 2006. "Are Internet Prices sticky?," BCL working papers cahier_etude_22, Central Bank of Luxembourg. [Downloadable!]
  3. James G. Mulligan & Nilotpal Das, 2004. "Vintage Effects and the Diffusion of Time-Saving Technological Innovations: The Adoption of Optical Scanners by U.S. Supermarkets."," Working Papers 04-06, University of Delaware, Department of Economics. [Downloadable!]
  4. Daniel Levy & Hainpeng (Allan) Chen & Sourav Ray & Mark Bergen, 2004. "Asymmetric Price Adjustment in the Small: An Implication of Rational Inattention," Emory Economics 0408, Department of Economics, Emory University (Atlanta). [Downloadable!]
    Other versions:
  5. Mark J. Zbaracki, 2007. "A sociological view of costs of price adjustment: contributions from grounded theory methods," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(6), pages 553-567. [Downloadable!]
  6. Alexander L. Wolman, 2007. "The frequency and costs of individual price adjustment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(6), pages 531-552. [Downloadable!]
    Other versions:
  7. James G. Mulligan & Nilotpal Das, 2006. "Item Pricing Laws, Supplier Behavior, and the Diffusion of Time-Saving Technology Innovations," Working Papers 06-11, University of Delaware, Department of Economics. [Downloadable!]
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