Booth Working Paper Series 17-20
67 Pages Posted: 24 Sep 2014 Last revised: 20 Jul 2017
Date Written: June 27, 2016
We use detailed micro data to document a causal response of local retail prices to changes in local house prices, with elasticities of 15%-20% across housing booms and busts. Notably, these price responses are largest in zip codes with many homeowners, and non-existent in zip codes with mostly renters. We provide evidence that these retail price responses are driven by changes in markups rather than by changes in local costs. We then argue that markups rise with house prices, particularly in high homeownership locations, because greater housing wealth reduces homeowners’ demand elasticity, and firms raise markups in response. Consistent with this explanation, shopping data confirms that house price changes affect the price sensitivity of homeowners, but not that of renters. Our evidence suggests a new source of markup variation in business cycle models.
Keywords: Housing Wealth, Markup, Retail Prices, Demand Elasticity, Business Cycle, Household Shopping
Suggested Citation: Suggested Citation
Stroebel, Johannes and Vavra, Joseph, House Prices, Local Demand, and Retail Prices (June 27, 2016). Kilts Center for Marketing at Chicago Booth – Nielsen Dataset Paper Series 1-030 . Available at SSRN: https://ssrn.com/abstract=2500457 or http://dx.doi.org/10.2139/ssrn.2500457