How Do National Firms Respond to Local Cost Shocks?
American Economic Review (2022), 112:5, 1737-1772
92 Pages Posted: 16 Nov 2020 Last revised: 20 Oct 2022
Date Written: February 18, 2022
Abstract
Recent research shows prices are insensitive to local demand conditions because national chains charge geographically uniform prices. We examine the price response to local cost shocks, including 68 excise tax changes, 76 sales tax changes, and other geographically-based cost differences, using data on 35,151 retail stores in 143 multi-state chains. We find local cost shocks are passed-through to local prices, with no spillovers to unaffected stores in otherwise affected chains, and at similar rates for national and local chains. Firms adjust local prices according to local cost changes, suggesting retailers respond asymmetrically to local cost and demand shocks.
Keywords: uniform pricing, excise taxes, firm optimization, tax incidence
JEL Classification: D40, L11, L81
Suggested Citation: Suggested Citation