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Best Prices: Price Discrimination and Consumer Substitution

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  • Judith A. Chevalier
  • Anil K. Kashyap

Abstract

We propose a method for aggregating prices when retailers use periodic sales to price-discriminate amongst heterogeneous customers. To do so, we introduce a model in which Loyal customers buy one brand and do not strategically time purchases, while Bargain Hunters always pay the lowest price available, the “best price”. We derive the exact price index and demonstrate empirically that accounting for our best price construct substantially improves the match between conventional price aggregation strategies and actual prices paid by consumers. We demonstrate that our methodology improves inflation measurement without imposing an unrealistically large burden on the data-collection agency.

Suggested Citation

  • Judith A. Chevalier & Anil K. Kashyap, 2014. "Best Prices: Price Discrimination and Consumer Substitution," NBER Working Papers 20768, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:20768
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    References listed on IDEAS

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    Cited by:

    1. Anderson, Eric & Malin, Benjamin A. & Nakamura, Emi & Simester, Duncan & Steinsson, Jón, 2017. "Informational rigidities and the stickiness of temporary Sales," Journal of Monetary Economics, Elsevier, vol. 90(C), pages 64-83.
    2. Benjamin Eden & Maya Eden & Jonah Yuen, 2019. "Temporary sales in response to aggregate shocks," Vanderbilt University Department of Economics Working Papers 19-00003, Vanderbilt University Department of Economics.
    3. Luttmann, Alexander & Gaggero, Alberto A, 2020. "Purchase discounts and travel premiums during holiday periods: Evidence from the airline industry," MPRA Paper 104863, University Library of Munich, Germany.
    4. Chen Yeh & David Argente, 2016. "A Menu Cost Model with Price Experimentation," 2016 Meeting Papers 1515, Society for Economic Dynamics.
    5. Ray, Sourav & Snir, Avichai & Levy, Daniel, 2023. "Retail Pricing Format and Rigidity of Regular Prices," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, pages 1-1.
    6. Chloe Lee & Wen Long & María J. Luengo‐Prado & Bent E. Sørensen, 2021. "Selective bargain hunting: A concise test of rational consumer search," Economic Inquiry, Western Economic Association International, vol. 59(3), pages 1089-1105, July.
    7. Xavier Jaravel, 2016. "The Unequal Gains from Product Innovations," 2016 Meeting Papers 437, Society for Economic Dynamics.
    8. Benjamin R. Shiller, 2022. "Discreet Personalized Pricing," CESifo Working Paper Series 10025, CESifo.
    9. Sheremirov, Viacheslav, 2020. "Price dispersion and inflation: New facts and theoretical implications," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 59-70.
    10. Kim, Seongeun, 2019. "Quality, price stickiness, and monetary policy," Journal of Macroeconomics, Elsevier, vol. 61(C), pages 1-1.

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    More about this item

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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