Cost shocks and price pass-through

The question of how firms pass changes in their input costs to consumer prices, their pass-through rate, is an important and a long-standing puzzle in economics and marketing. I study this problem in the retail grocery sector, focusing on cost shocks from minimum wage increases. Exploiting spatial variation in U.S. minimum wage policies, NielsenIQ scanner data from 2011–2021, and a stacked difference-in-differences design, I find that a 10 percent increase in the minimum wage raises retail grocery prices by 1.1 to 1.5 percent. I also document forward-looking behavior as retailers increase prices immediately after legislation is enacted, rather than waiting until the policy is implemented. To examine heterogeneity, I use causal machine learning methods and show that pass-through rates are lower among larger retailers and in higher-income markets, which implies greater ability to absorb cost shocks. By contrast, retailers that rely less on promotions exhibit higher pass-through, which indicates that pricing adjustments can also occur through changes in discounting strategies rather than solely through base price increases. These findings highlight that the transmission of cost shocks depends on firm strategy and market context, with implications for both policymakers evaluating minimum wage policies and managers shaping retail pricing decisions.