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Small Price Responses to Large Demand Shocks

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Listed author(s):
  • J. David Lopez-Salido

    (Federal Reserve Board)

  • Etienne Gagnon

    (Federal Reserve Board)

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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File URL: https://economicdynamics.org/meetpapers/2015/paper_1480.pdf
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Paper provided by Society for Economic Dynamics in its series 2015 Meeting Papers with number 1480.

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Date of creation: 2015
Handle: RePEc:red:sed015:1480
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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Find related papers by 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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Cited by:

  1. Etienne Gagnon & David López-Salido & Jason Sockin, 2017. "The Cyclicality of Sales, Regular, and Effective Prices: Business Cycle and Policy Implications: Comment," American Economic Review, American Economic Association, vol. 107(10), pages 3229-3242, October.
  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. 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.

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