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Quantum Prices

Author

Listed:
  • Diego Aparicio
  • Roberto Rigobon

Abstract

This paper studies pricing in the fashion retail industry. Online data was collected for approximately 350,000 distinct products from over 65 retailers in the U.S. and the U.K. We present evidence that a fair fraction of retailers implement an extreme form of price stickiness that we describe as quantum prices: a large number of different products are priced using just a small number of sparse prices, with price changes occurring rarely and in large increments. Normalized price clustering measures are used to show that retailers use quantum prices within- and across- categories, and this clustering is not explained by popular prices, ranges of prices, assortment size, or digit endings. This pricing strategy is consistent with a behavioral model where fewer prices makes price advertising more effective. An implication of this model is that advertising is increasingly effective when the same prices are used across product lines, i.e. for new products. Finally, quantum prices affect product introductions and price adjustment strategies at the firm level, while it creates larger deviations of the law of one price and hinders the computation of inflation at the macro level.

Suggested Citation

  • Diego Aparicio & Roberto Rigobon, 2020. "Quantum Prices," NBER Working Papers 26646, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26646
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    More about this item

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising

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