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Rigidity, Dispersion and Discreteness in Chain Prices

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Author Info

  • Benjamin Eden

    ()
    (Department of Economics, Vanderbilt University)

  • Matthew Jaremski

    ()
    (Department of Economics, Vanderbilt University)

Abstract

This paper studies price setting within a chain of grocery stores, using a scanner database that contains observations of retail prices for 435 products within 75 stores over 121 weeks. We find price dispersion within the chain. Stores differentiate themselves by the prices of relatively few items. Typically most prices in the store are at the mode of the cross sectional price distribution, some are above the mode and some are below the mode. The probability of a price change is 3.6% when the price is at the mode and 76.2% when the price is not at the mode. We explain the apparent attraction to the mode in terms of a model in which price discreteness plays an important role but there is no inertia. We also find that the probability of a price change is higher when the deviation from the mean of the cross sectional price distribution is large. But unlike conventional wisdom, the probability of a price change is higher for young prices.

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File URL: http://www.accessecon.com/pubs/VUECON/vu09-w03R.pdf
File Function: Revised version, 2009
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0903.

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Date of creation: Mar 2009
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Handle: RePEc:van:wpaper:0903

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

Related research

Keywords: Price discreteness; price dispersion; price changes substitution; the Friedman rule; seigniorage;

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References

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  1. Álvarez, L. & Dias, D. & Dhyne, E. & Hoffmann, J. & Jonker, N. & Le Bihan, H. & Lünnemann, P. & Rumler, F. & Veronese, G. & Vilmunen, J., 2005. "Price Setting in the Euro Area: Some Stylized Facts from Individual Consumer Price Data," Working papers 136, Banque de France.
  2. Andrew C. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," NBER Working Papers 2311, National Bureau of Economic Research, Inc.
  3. Patrick J. Kehoe & Virgiliu Midrigan, 2007. "Sales and the real effects of monetary policy," Working Papers 652, Federal Reserve Bank of Minneapolis.
  4. Eden, Benjamin, 1994. "The Adjustment of Prices to Monetary Shocks When Trade Is Uncertain and Sequential," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 493-509, June.
  5. Luis J. Álvarez & Ignacio Hernando, 2004. "Price setting behaviour in Spain: stylised facts using consumer price micro data," Banco de Espa�a Working Papers 0422, Banco de Espa�a.
  6. Peter J. Klenow & Oleksiy Kryvtsov, 2005. "State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation?," NBER Working Papers 11043, National Bureau of Economic Research, Inc.
  7. Jeffrey R. Campbell & Benjamin Eden, 2005. "Rigid prices: evidence from U.S. scanner data," Working Paper Series WP-05-08, Federal Reserve Bank of Chicago.
  8. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  9. Aguirregabiria, Victor, 1999. "The Dynamics of Markups and Inventories in Retailing Firms," Review of Economic Studies, Wiley Blackwell, vol. 66(2), pages 275-308, April.
  10. Dana, James D, Jr, 2001. "Monopoly Price Dispersion under Demand Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(3), pages 649-70, August.
  11. Lach, Saul & Tsiddon, Daniel, 1996. "Staggering and Synchronization in Price-Setting: Evidence from Multiproduct Firms," American Economic Review, American Economic Association, vol. 86(5), pages 1175-96, December.
  12. Caplin, A. & Leahy, J., 1989. "State-Dependent Pricing And The Dynamics Of Money And Output," Discussion Papers 1989_32, Columbia University, Department of Economics.
  13. Mankiw, N. Gregory & Reis, Ricardo, 2007. "Sticky Information in General Equilibrium," Scholarly Articles 3415323, Harvard University Department of Economics.
  14. Rob, Rafael, 1985. "Equilibrium Price Distributions," Review of Economic Studies, Wiley Blackwell, vol. 52(3), pages 487-504, July.
  15. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
  16. Eden, Benjamin, 1990. "Marginal Cost Pricing When Spot Markets Are Complete," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1293-1306, December.
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Cited by:
  1. Glandon, PJ & Jaremski, Matthew, 2012. "Sales and Firm Entry: The Case of Wal-Mart," Working Papers 2012-03, Department of Economics, Colgate University.

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