Retail Price Ripples

Much like small ripples in a stream, which get lost in the larger waves, small changes in retail prices often fly under the radar of public perceptions, while large price changes appear as marketing moves associated with demand and competition. Unnoticed, these could increase consumers’ out-of-pocket expenses. Indeed, retailers could boost their profits by making numerous small price increases or by obfuscating large price increases with numerous small price decreases, thereby bypassing the consumer’s full attention and consideration, and triggering consumer fairness concerns. Yet only a handful of papers study small price changes. Extant results are often based on a single retailer, limited products, short time span, and legacy datasets dating back to the 1980s and 1990s – leaving their current practical relevance questionable. Researchers have also questioned whether the reported observations of small price changes are artifacts of measurement errors driven by data aggregation. In a series of analyses of a large dataset (almost 79 billion weekly price observations from 2006 to 2015, covering 527 products, and about 35,000 stores across 161 retailers), we find robust evidence of asymmetric pricing in the small (APIS), where small price increases outnumber small price decreases, but no such asymmetry is present in the large. We also document the reverse phenomenon (APIS-R), where small price decreases outnumber small price increases. Our results are robust to several possible measurement issues. Importantly, our findings indicate a greater current relevance and generalizability of such asymmetric pricing practices than the existing literature recognizes.