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House Prices, Local Demand, and Retail Prices

Johannes Ströbel and Joseph Vavra ()
Authors registered in the RePEc Author Service: Johannes Stroebel

No 10612, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We use detailed micro data to document a causal response of local retail price to changes in house prices, with elasticities of 15%-20% across housing booms and busts. Notably, these price responses are largest in zip codes with many homeowners, and non-existent in zip codes with mostly renters. We provide evidence that these retail price responses are driven by changes in markups rather than by changes in local costs. We then argue that markups rise with house prices, particularly in high homeownership locations, because greater housing wealth reduces homeowners’ demand elasticity, and firms raise markups in response. Consistent with this explanation, shopping data confirms that house price changes have opposite effects on the price sensitivity of homeowners and renters. Our evidence has implications for monetary, labor, and urban economics, and suggests a new source of markup variation in business cycle models.

Keywords: business cycle; demand elasticity; household shopping; housing wealth; markup; retail prices (search for similar items in EconPapers)
JEL-codes: E12 E21 E31 E32 E52 R22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-ure
Date: 2015-05
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Working Paper: House Prices, Local Demand, and Retail Prices (2015) Downloads
Working Paper: House Prices, Local Demand, and Retail Prices (2014) Downloads
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