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House Prices, Local Demand, and Retail Prices

67 Pages Posted: 24 Sep 2014 Last revised: 20 Jul 2017

Johannes Stroebel

New York University (NYU); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Joseph Vavra

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: June 27, 2016

Abstract

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

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

Johannes Stroebel (Contact Author)

New York University (NYU) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Joseph Vavra

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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