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Relative Price Dispersion: Evidence and Theory

Greg Kaplan, Guido Menzio (), Leena Rudanko and Nicholas Trachter
Additional contact information
Greg Kaplan: Princeton University and NBER

No 16-2, Working Paper from Federal Reserve Bank of Richmond

Abstract: We use a large dataset on retail pricing to document that a sizable portion of the cross-sectional variation in the price at which the same good trades in the same period and in the same market is due to the fact that stores that are, on average, equally expensive set persistently different prices for the same good. We refer to this phenomenon as relative price dispersion. We argue that relative price dispersion stems from sellers’ attempts to discriminate between high-valuation buyers who need to make all of their purchases in the same store and low-valuation buyers who are willing to purchase different items from different stores. We calibrate our theory and show that it is not only consistent with the extent and sources of dispersion in the price that different sellers charge for the same good, but also with the extent and sources of dispersion in the prices that different households pay for the same basket of goods and with the relationship between prices paid and the number of stores visited by different households.

JEL-codes: D40 D83 E31 L11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-mac and nep-mkt
Date: 2016-01-15
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Working Paper: Relative Price Dispersion: Evidence and Theory (2016) Downloads
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