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

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Author Info
Mark Bergen (University of Minnesota)
Daniel Levy (Bar-Ilan University)
Sourav Ray (McMaster University)
Paul Rubin (Emory University)
Benjamin Zeliger (Cornell University)

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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¢ or 9.6% 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¢ per item on average, but are higher than the non- item-pricing law store prices by about 10¢ 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 EconWPA in its series Law and Economics with number 0405005.

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Length: 67 pages
Date of creation: 27 May 2004
Date of revision: 02 Jun 2005
Handle: RePEc:wpa:wuwple:0405005

Note: Type of Document - pdf; pages: 67
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Related research
Keywords: Item Pricing Laws; Costs of Item Pricing Laws; Benefits of Item Pricing Laws; Cost of Price Adjustment; Pricing Accuracy; Electronic Shelf Label System; Pricing Regulation; Cost of Pricing; Supermarket Chains;

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Find related papers by JEL classification:
K20 - Law and Economics - - Regulation and Business Law - - - General
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
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
M20 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - General
M30 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - General
Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
D40 - Microeconomics - - Market Structure and Pricing - - - General

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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. Levy, Daniel & Müller, Georg & Chen, Allan (Haipeng) & Bergen, Mark & Dutta, Shantanu, 2008. "Holiday Price Rigidity and Cost of Price Adjustment," MPRA Paper 13095, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  2. 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!]
  3. 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!]
  4. Patrick Lünnemann & Ladislav Wintr, 2006. "Are Internet Prices sticky?," BCL working papers cahier_etude_22, Central Bank of Luxembourg. [Downloadable!]
  5. 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:
  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. Patrick Lunnemann & Ladislav Wintr, 2006. "Are internet prices sticky?," Working Paper Series 645, European Central Bank. [Downloadable!]
  8. 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!]
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