Multi-Product Pricing: Theory and Evidence From Large Retailers in Israel
45 Pages Posted: 29 May 2020 Last revised: 25 Aug 2020
Date Written: April 27, 2020
Standard theories of price adjustment are based on the problem of a single-product firm, and therefore, they may not be well suited to analyze price dynamics in the economy with multi-product firms. To guide new theory, we study a unique dataset with comprehensive coverage of daily prices in large multi-product food retailers in Israel. We find that a typical retail store synchronizes its regular price changes around occasional “peak” days when, once or twice a month, it reprices around 10% of its products. To assess the implications of partial price synchronization for inflation dynamics, we develop a new price-setting model in which a multi-product firm faces economies of scope in price adjustment, and synchronization is endogenous. The model generates the partial synchronization pattern with peaks of re-pricing activity observed in the data. We show analytically and numerically that synchronization of price changes attenuates the average price response to a monetary shock, but only high degrees of synchronization can substantially strengthen monetary non-neutrality. A model calibrated to the degree of synchronization of price changes observed in the data generates considerable aggregate price flexibility.
Keywords: Inflation, Prices, Multi-Product Pricing, Menu Cost, Monetary Non-Neutrality
JEL Classification: D21, D22, E31, E52, L11
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