The Morphology of Price Dispersion

Abstract

This paper is a study of the shape and structure of the distribution of prices at which an identical good is sold in a given market and time period. We find that the typical price distribution is symmetric and leptokurtic, with a standard deviation between 19% and 36%. Only 10% of the variance of prices is due to variation in the expensiveness of the stores at which a good is sold, while the remaining 90% is due, in approximately equal parts, to differences in the average price of a good across equally expensive stores and to differences in the price of a good across transactions at the same store. We show that the distribution of prices that households pay for the same bundle of goods is approximately Normal, with a standard deviation between 9% and 14%. Half of this dispersion is due to differences in the expensiveness of the stores where households shop, while the other half is mostly due to differences in households' choices of which goods to purchase at which stores. We find that households with fewer employed members pay lower prices, and do so by visiting a larger number of stores, rather than by shopping more frequently.JEL Codes: D2, D4, E3, L1

Price Dispersion When Stores Sell Multiple Goods

“…1 The valuep jst measures the (log) relative price of a good j sold by store s relative to the price of that good sold by every store in the geographical region, at week t. For example, ifp jst = 0.1, we have that, at time t, good j is 10 percent more expensive in store s than in the other stores in the area. Likewise, whenp jst = -0.1, we have that the good is 10 percent cheaper at store s. Figure 1 plots the average distribution of normalized prices across all goods, markets, and time periods (the distribution is expenditure weighted), borrowed from Kaplan and Menzio (2015), which uses data from the KNRS dataset. Also, to aid in the analysis, the …gure plots the density of a normal distribution with the same mean and variance.…”

Shopping around: how households adjusted food spending over the Great Recession

“…This is partly facilitated by the fact that identical products are often sold at different prices in different stores. Kaplan and Menzio (2014a) show that in the US there is a high degree of dispersion in the price at which an identical good is sold across stores, within a given geographic market and period of time. Eden (2013) documents price dispersion across goods sold in supermarkets in Chicago and shows that prices are more dispersed for goods in which there is higher uncertainty about aggregate demand.…”

Equilibrium Price Dispersion Across and within Stores

“…In words, the necessary and su¢ cient condition (12) states that the ratio of captive buyers-i.e. buyers who are in contact with a particular seller and nobody else-to noncaptive buyers-i.e.…”

“…For instance, Sorensen (2000) …nds that the average standard deviation of the price posted by di¤erent pharmacies for the same drug in the same town in upstate New York is 22%. In a more systematic study of price dispersion that covers 1.4 million goods in 54 geographical markets within the United States, Kaplan and Menzio (2014b) …nd that the average standard deviation of the price at which the same product is sold within the same geographical area and the same quarter is 19%. Moreover, it appears that price dispersion is caused by both di¤erence in prices across di¤erent stores and di¤erence in prices within each store.…”

“…Moreover, it appears that price dispersion is caused by both di¤erence in prices across di¤erent stores and di¤erence in prices within each store. For instance, Kaplan and Menzio (2014b) …nd that on average roughly half of the overall variance of prices for the same good in the same market and in the same quarter is due to the fact that di¤erent stores sell the same good at a di¤erent price on average, and the other half is due to the fact that the same store sells the same good at di¤erent prices in di¤erent transactions taking place during the same quarter.…”