Best Prices: Price Discrimination and Consumer Substitution

70 Pages Posted: 22 Dec 2014

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

Date Written: December 2014

Abstract

We propose a method for aggregating prices when retailers use periodic sales to price-discriminate amongst heterogeneous customers. To do so, we introduce a model in which Loyal customers buy one brand and do not strategically time purchases, while Bargain Hunters always pay the lowest price available, the “best price”. We derive the exact price index and demonstrate empirically that accounting for our best price construct substantially improves the match between conventional price aggregation strategies and actual prices paid by consumers. We demonstrate that our methodology improves inflation measurement without imposing an unrealistically large burden on the data-collection agency.

Suggested Citation

Chevalier, Judith A. and Kashyap, Anil K., Best Prices: Price Discrimination and Consumer Substitution (December 2014). NBER Working Paper No. w20768. Available at SSRN: https://ssrn.com/abstract=2541544

Judith A. Chevalier (Contact Author)

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
United States

Anil K. Kashyap

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

Register to save articles to
your library

Register

Paper statistics

Downloads
10
Abstract Views
468
PlumX Metrics