How Do National Firms Respond to Local Shocks?: Evidence from Excise Taxes
73 Pages Posted: 16 Nov 2020
Date Written: September 29, 2020
[enter Abstract Body]The pass-through of local shocks to prices is important for trade adjustment, inequality, and tax policy. Standard pricing models assume that firms fully respond to local shocks, but recent research suggests that local prices may be insensitive to them, because national chains charge geographically uniform prices. Using data on beer, liquor, cigarette, and soda prices in 34,000 retail stores, we examine the impact of 73 local costs shocks induced by excise tax changes. Even though within-firm prices vary little across geographic markets, we find local prices respond sharply to local cost shocks. Local excise taxes are passed-through to local prices, with no spill-overs to unaffected stores in affected chains. Pass-through rates are similar for national and local chains, and for county, state, and federal taxes. Pricing frictions do not attenuate local cost pass-through, suggesting prices respond asymmetrically to local cost and demand shocks. We discuss implications for pricing models.
Keywords: uniform pricing, excise taxes, firm optimization, tax incidence
JEL Classification: D40, L11, L81
Suggested Citation: Suggested Citation