Relative Price Dispersion: Evidence and Theory

73 Pages Posted: 4 Mar 2016  

Greg Kaplan

Princeton University - Department of Economics

Guido Menzio

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Leena Rudanko

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Nicholas Trachter

Federal Reserve Banks - Federal Reserve Bank of Richmond

Multiple version iconThere are 3 versions of this paper

Date Written: 2016-02-29

Abstract

We use a large data set on retail pricing to document that a sizable portion of the cross-sectional variation in the price at which the same good trades in the same period and in the same market is due to the fact that stores that are, on average, equally expensive set persistently different prices for the same good. We refer to this phenomenon as relative price dispersion. We argue that relative price dispersion stems from sellers’ attempts to discriminate between high-valuation buyers who need to make all of their purchases in the same store and low-valuation buyers who are willing to purchase different items from different stores. We calibrate our theory and show that it is not only consistent with the extent and sources of dispersion in the price that different sellers charge for the same good, but also with the extent and sources of dispersion in the prices that different households pay for the same basket of goods and with the relationship between prices paid and the number of stores visited by different households.

Keywords: Price dispersion, Equilibrium product market search, Retail pricing, Goods

JEL Classification: D40, D83, E31, L11

Suggested Citation

Kaplan, Greg and Menzio, Guido and Rudanko, Leena and Trachter, Nicholas, Relative Price Dispersion: Evidence and Theory (2016-02-29). FRB of Philadelphia Working Paper No. 16-6. Available at SSRN: https://ssrn.com/abstract=2742045

Greg Kaplan (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Guido Menzio

University of Pennsylvania - Department of Economics ( email )

160 McNeil Building
3718 Locust Walk
Philadelphia, PA 19104
United States
215-898-5170 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Leena Rudanko

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Nicholas Trachter

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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