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Small Price Responses to Large Demand Shocks

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Abstract

We study the pricing response of U.S. supermarkets to large demand shocks triggered by labor conflicts, mass population relocation, and shopping sprees around major snowstorms and hurricanes. Our focus on demand shocks is novel in the empirical literature that uses large datasets of individual data to bridge micro price behavior and aggregate price dynamics. We find that 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 even though stores adjust prices frequently. We also uncover evidence of tit-for-tat behavior by which retailers with radically different demand shocks nonetheless seek to match their local competitors' pricing movements and recourse to sales and promotions.

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  • Gagnon, Etienne & Lopez-Salido, J. David, 2014. "Small Price Responses to Large Demand Shocks," Finance and Economics Discussion Series 2014-18, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2014-18
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    Cited by:

    1. Gagnon, Etienne & Lopez-Salido, J. David & Sockin, Jason A., 2015. "The Cyclicality of Sales, Regular and Effective Prices: Comment," Finance and Economics Discussion Series 2015-52, Board of Governors of the Federal Reserve System (U.S.).
    2. Johannes Stroebel & Joseph Vavra, 2014. "House Prices, Local Demand, and Retail Prices," NBER Working Papers 20710, National Bureau of Economic Research, Inc.
    3. Adam Reiff & Peter Karadi, 2014. "Menu Costs, Aggregate Fluctuations and Large Shocks," 2014 Meeting Papers 914, Society for Economic Dynamics.
    4. Gregory Howard, 2017. "The Migration Accelerator: Labor Mobility, Housing, and Aggregate Demand," 2017 Meeting Papers 563, Society for Economic Dynamics.
    5. repec:aea:aecrev:v:107:y:2017:i:10:p:3229-42 is not listed on IDEAS
    6. 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.

    More about this item

    Keywords

    Demand shocks; inflation; sales; labor conflicts; mass population displacement; severe weather events;

    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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