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Pass-Through in Retail and Wholesale

  • Emi Nakamura

This paper studies how prices comove across products, firms and locations to gauge the relative importance of retailer versus manufacturer-level shocks in determining prices. I make use of a large panel data set on prices for a cross-section of retailers in the U.S. I analyze prices at the barcode or "Universal Product Code'' (UPC) level for individual stores. I find that only 16% of the variation in prices is common across stores selling an identical product. 65% of the price variation is common to stores within a particular retail chain (but not across retail chains), while 17% is completely idiosyncratic to the store and product. Product categories with frequent temporary "sales'' exhibit a disproportionate amount of completely idiosyncratic price variation. My results suggest that most of the observed price variation arises from retail-level rather than manufacturer-level demand and supply shocks. However, the behavior of prices is difficult to relate to observed variation in costs and demand at the retail level. This suggests that retail prices may vary largely as a consequence of dynamic pricing strategies on the part of retailers or manufacturers, rather than static demand and supply shocks.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.2.430
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 2 (May)
Pages: 430-37

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Handle: RePEc:aea:aecrev:v:98:y:2008:i:2:p:430-37
Note: DOI: 10.1257/aer.98.2.430
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  1. Patrick J. Kehoe & Virgiliu Midrigan, 2008. "Temporary price changes and the real effects of monetary policy," Working Papers 661, Federal Reserve Bank of Minneapolis.
  2. Pinelopi K. Goldberg & Rebecca Hellerstein, 2007. "A Structural Approach to Identifying the Sources of Local-Currency Price Stability," NBER Working Papers 13183, National Bureau of Economic Research, Inc.
  3. Edward P. Lazear, 1984. "Retail Pricing and Clearance Sales," NBER Working Papers 1446, National Bureau of Economic Research, Inc.
  4. Sobel, Joel, 1984. "The Timing of Sales," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 353-68, July.
  5. Daniel Hosken & David Reiffen, 2004. "Patterns of Retail Price Variation," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 128-146, Spring.
  6. Nakamura, Emi & Zerom, Dawit, 2008. "Accounting for Incomplete Pass-Through," MPRA Paper 14389, University Library of Munich, Germany.
  7. Engel, Charles, 1993. "Real exchange rates and relative prices : An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 35-50, August.
  8. Leibtag, Ephraim S. & Nakamura, Alice & Nakamura, Emi & Zerom, Dawit, 2007. "Cost Pass-Through In The U.S. Coffee Industry," Economic Research Report 7253, United States Department of Agriculture, Economic Research Service.
  9. Christian Broda & David E. Weinstein, 2007. "Product Creation and Destruction: Evidence and Price Implications," NBER Working Papers 13041, National Bureau of Economic Research, Inc.
  10. 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.
  11. Xavier Drèze & David R. Bell, 2003. "Creating Win–Win Trade Promotions: Theory and Empirical Analysis of Scan-Back Trade Deals," Marketing Science, INFORMS, vol. 22(1), pages 16-39, November.
  12. 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.
  13. Ariel T. Burstein & Joao C. Neves & Sergio Rebelo, 2000. "Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilizations," RCER Working Papers 473, University of Rochester - Center for Economic Research (RCER).
  14. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
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