WHAT DRIVES RETAIL PRICE MOVEMENTS?
September 23, 2008
Retail prices vary enormously over short time periods -- within a year, the price of a typical grocery product can vary by 20-30 percent. These movements are large relative to the factors that economists usually think of as driving prices, such as wages and firm productivity. A new National Bureau of Economic Research (NBER) study examines how prices co-move across products, firms and locations to understand what drives these large price movements.
Using a dataset that consists of weekly price and quantity series throughout 2004 for about 7,000 grocery stores across the United States, the NBER found that:
- Only 16 percent of price variation is common across all stores selling an identical product, while 65 percent of price variation is common to stores within a particular retail chain (but not across chains) and 17 percent of variation is completely idiosyncratic to the individual store and product.
- Of the price movements observed, they did not arise from manufacturer demand or supply shocks, because those factors presumably lead to common price movements across all stores.
- In fact, only a small fraction, 19 percent, of price variation is common to all products in a category at a given retail store.
- Prices were found to be highly variable (prices moving 10 percent to 15 percent) and highly transitory -- a low price this week does not mean a low price next week.
Therefore, retail demand and supply shocks are not the likely "drivers" of the observed price movements, says NBER.
These patterns suggest that retail prices vary largely as a consequence of dynamic pricing strategies on the part of retailers or manufacturers, rather than current demand and supply conditions. Not surprisingly, temporary sales play an important role in this price variation, accounting for a large fraction of the observed price movements, adds NBER.
Source: Emi Nakamura, "Pass-Through in Retail and Wholesale," National Bureau of Economic Research, Working Paper, No. 13965, April 2008.
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