Best Prices

56 Pages Posted: 18 Jan 2011 Last revised: 20 Jan 2011

See all articles by Judith A. Chevalier

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: January 2011

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 (January 2011). NBER Working Paper No. w16680. Available at SSRN: https://ssrn.com/abstract=1740310

Judith A. Chevalier (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
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National Bureau of Economic Research (NBER)

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Anil K. Kashyap

University of Chicago, Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
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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 )

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Chicago, IL 60604
United States

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