Best Prices

Chicago Booth Research Paper No. 11-01

Chicago Booth Initiative on Global Markets Working Paper No. 59

Fama-Miller Working Paper

57 Pages Posted: 9 Jan 2011 Last revised: 4 Apr 2013

Judith A. Chevalier

Yale School of Management; National Bureau of Economic Research (NBER)

Anil K. Kashyap

University of Chicago, Booth School of Business; National Bureau of Economic Research (NBER); Federal Reserve Bank of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2012

Abstract

We explore the role of strategic price-discrimination by retailers for price determination and inflation dynamics. We model two types of customers, “loyals" who buy only one brand and do not strategically time purchases, and “shoppers" who seek out low-priced products both across brands and across time. Shoppers always pay the lowest price available, the “best price”. Retailers in this setting optimally choose long periods of constant regular prices punctuated by frequent temporary sales. Supermarket scanner data confirm the model's predictions: the average price paid is closely approximated by a weighted average of the fixed weight average list price and the “best price". In contrast to standard menu cost models, our model implies that sales are an essential part of the price plan and the number and frequency of sales may be an important mechanism for adjustment to shocks. We conclude that our “best price" construct provides a tractable input for constructing price series.

Suggested Citation

Chevalier, Judith A. and Kashyap, Anil K., Best Prices (July 1, 2012). Chicago Booth Initiative on Global Markets Working Paper No. 59; Fama-Miller Working Paper. Available at SSRN: https://ssrn.com/abstract=1735431 or http://dx.doi.org/10.2139/ssrn.1735431

Judith A. Chevalier

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Anil K. Kashyap (Contact Author)

University of Chicago, Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7260 (Phone)
773 702-0458 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
773-702-7260 (Phone)
773-702-0458 (Fax)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

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