Price Transparency and Retail Prices

Posted: 27 Mar 2015 Last revised: 12 Apr 2017

Federico Rossi

Purdue University - Krannert School of Management

Pradeep K. Chintagunta

University of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: January 23, 2015

Abstract

Price transparency initiatives are typically undertaken by third parties to ensure that consumers can compare the prices of competing offers in markets where obtaining such information is costly. Such practices have recently become widespread, yet it is unclear whether the increased price competition due to lower search costs overcomes the potential for collusion between competitors due to lower price coordination costs. Motivated by this question, we investigate the effect of mandatory price posting (on large electronic signs) by competing gas stations on their pricing behavior in the Italian motorway. When prices are posted, the average price of gasoline decreases by 1 cent per liter, which represents about 20% of stations' margins. About half the price decrease can be attributed to the introduction of a sign posting a station's own price and those of its nearest neighbors, with the other half coming from the introduction of other signs posting the prices of other stations on the same road. Despite the price reduction, however, the introduction of signs seems to have little impact on price dispersion, suggesting that price uncertainty persists even after the policy is implemented. Analysis of customer transaction data confirms this finding, showing that less than 10% of consumers use the posted prices effectively.

Keywords: price transparency, posted prices, retail competition, price information, difference-in-differences

Suggested Citation

Rossi, Federico and Chintagunta, Pradeep K., Price Transparency and Retail Prices (January 23, 2015). Chicago Booth Research Paper No. 15-11. Available at SSRN: https://ssrn.com/abstract=2585228 or http://dx.doi.org/10.2139/ssrn.2585228

Federico Rossi

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Pradeep K. Chintagunta (Contact Author)

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-8015 (Phone)
773-702-0458 (Fax)

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