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Small Price Responses to Large Demand Shocks

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

    (Federal Reserve Board)

  • Etienne Gagnon

    (Federal Reserve Board)

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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