High-Frequency Price Fluctuations in Brick-and-Mortar Retailing
58 Pages Posted: 4 Dec 2016 Last revised: 13 Dec 2018
Date Written: December 13, 2018
The digital revolution of pricing enables retailers to change their prices more frequently than ever before. While the industry endorses this development, critics fear it could foster excessive price fluctuations. This paper studies price fluctuations in the context of brick-and-mortar retailing with business hours. First, we develop a model of dynamic price competition and show that intraday fluctuations in retail prices can emerge from strategic interaction among retailers alone, even in the absence of variation in wholesale prices and demand. Furthermore, the model makes detailed predictions concerning the shapes of pricing patterns. As a second step, we test and verify the model's predictions using an extensive dataset on the German retail gasoline market. Moreover, we calibrate the model and show that regulations aiming to curb price fluctuations can backfire.
Keywords: Spatial competition, Edgeworth cycle, Retail gasoline
JEL Classification: D43; L11; L13; L81
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