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Small Price Responses to Large Demand Shocks

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  • Etienne Gagnon
  • David López-Salido

Abstract

We study the pricing response of U.S. supermarkets to large demand shocks triggered by labor conflicts, mass population displacement, and shopping sprees around major snowstorms and hurricanes. We find that these large swings in demand have, at best, modest effects on the level of retail prices, consistent with flat short- to medium-term supply curves. This finding holds even when shocks are highly persistent and despite the fact that stores adjust prices frequently. We also provide evidence that retailers maintain frequent promotional sales even as their demand varies and that they seek to match movements in their local competitors’ recourse to promotional sales.

Suggested Citation

  • Etienne Gagnon & David López-Salido, 2020. "Small Price Responses to Large Demand Shocks," Journal of the European Economic Association, European Economic Association, vol. 18(2), pages 792-828.
  • Handle: RePEc:oup:jeurec:v:18:y:2020:i:2:p:792-828.
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    Cited by:

    1. Etienne Gagnon & David López-Salido & Jason Sockin, 2017. "The Cyclicality of Sales, Regular, and Effective Prices: Business Cycle and Policy Implications: Comment," American Economic Review, American Economic Association, vol. 107(10), pages 3229-3242, October.
    2. Marcelle Chauvet & Insu Kim, 2021. "Incomplete Price Adjustment and Inflation Persistence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(6), pages 1337-1371, September.
    3. Bixuan Yang & Frank Asche & Tao Li, 2022. "Consumer behavior and food prices during the COVID‐19 pandemic: Evidence from Chinese cities," Economic Inquiry, Western Economic Association International, vol. 60(3), pages 1437-1460, July.
    4. Johannes Stroebel & Joseph Vavra, 2019. "House Prices, Local Demand, and Retail Prices," Journal of Political Economy, University of Chicago Press, vol. 127(3), pages 1391-1436.
    5. Mikael Carlsson, 2017. "Microdata Evidence on the Empirical Importance of Selection Effects in Menu‐Cost Models," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(8), pages 1803-1830, December.
    6. Jean Hindriks & Leonardo Madio & Valerio Serse, 2021. "Promotion Ban and Heterogeneity in Retail Prices during the Great Lockdown," CESifo Working Paper Series 9074, CESifo.
    7. William Ginn, 2022. "Climate Disasters and the Macroeconomy: Does State-Dependence Matter? Evidence for the US," Economics of Disasters and Climate Change, Springer, vol. 6(1), pages 141-161, March.
    8. Meyer, Brent H. & Prescott, Brian & Sheng, Xuguang Simon, 2022. "The impact of the COVID-19 pandemic on business expectations," International Journal of Forecasting, Elsevier, vol. 38(2), pages 529-544.
    9. Kanika Mahajan & Shekhar Tomar, 2021. "COVID‐19 and Supply Chain Disruption: Evidence from Food Markets in India†," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(1), pages 35-52, January.
    10. Peter Karadi & Adam Reiff, 2019. "Menu Costs, Aggregate Fluctuations, and Large Shocks," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(3), pages 111-146, July.
    11. Gregory Howard, 2017. "The Migration Accelerator: Labor Mobility, Housing, and Aggregate Demand," 2017 Meeting Papers 563, Society for Economic Dynamics.
    12. Kanika Mahajan & Shekhar Tomar, 2020. "Here Today, Gone Tomorrow: COVID-19 and Supply Chain Disruptions," Working Papers 28, Ashoka University, Department of Economics.
    13. Alberto Cavallo & Eduardo Cavallo & Roberto Rigobon, 2014. "Prices and Supply Disruptions during Natural Disasters," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(S2), pages 449-471, November.
    14. Christopher Hansman & Harrison Hong & Áureo de Paula & Vishal Singh, 2020. "A Sticky-Price View of Hoarding," NBER Working Papers 27051, National Bureau of Economic Research, Inc.
    15. Dong, Xiao, 2022. "Lack of local pricing response in national retail chains during large and localized demand peaks: Evidence from college move-ins and instant noodles," Economics Letters, Elsevier, vol. 213(C).
    16. Lloyd, T.A. & McCorriston, S. & Morgan, C.W. & Poen, E. & Zgovu, E., 2014. "Retail price dynamics and retailer heterogeneity: UK evidence," Economics Letters, Elsevier, vol. 124(3), pages 434-438.
    17. Yang, Bixuan & Asche, Frank & Li, Tao, 2021. "Food Price Inflation and Demand Shocks: Evidence from Chinese Cities during the Covid-19 Epidemic," 2021 Annual Meeting, August 1-3, Austin, Texas 314067, Agricultural and Applied Economics Association.
    18. Laurien Gilbert, 2018. "Gains from Product Variety and the Local Business Cycle," 2018 Meeting Papers 46, Society for Economic Dynamics.
    19. Chen Yeh & David Argente, 2016. "A Menu Cost Model with Price Experimentation," 2016 Meeting Papers 1515, Society for Economic Dynamics.
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    21. Zheng, Rui & Shou, Biying & Yang, Jun, 2021. "Supply disruption management under consumer panic buying and social learning effects," Omega, Elsevier, vol. 101(C).
    22. Roldan-Blanco, Pau & Gilbukh, Sonia, 2021. "Firm dynamics and pricing under customer capital accumulation," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 99-119.
    23. Graff Zivin, Joshua & Liao, Yanjun & Panassié, Yann, 2023. "How hurricanes sweep up housing markets: Evidence from Florida," Journal of Environmental Economics and Management, Elsevier, vol. 118(C).

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    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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