Flexibility in prices is generally assumed to be a key factor in gaining competitive advantage in sectors like the supermarket grocery stores. However, changing prices frequently is a costly exercise for retailers. The degree of price rigidity is therefore determined by this need to respond to changing market conditions as well as the inherent costs of changing prices. This tension makes the degree of price rigidity of great empirical importance to marketers and economists. To this end, this thesis empirically explores price rigidity in the supermarket grocery sector. It investigates price rigidity using observational price data over a period of 52 weeks, across 11 categories including almost one hundred SKUs, and from three different stores in a Montreal area. Price rigidity is estimated both in temporary (sales price) as well as more permanent price changes (regular price). It also investigates asymmetries in price rigidities. The general results show a surprisingly high degree of price rigidity with a higher rigidity in permanent price changes being complemented by a compensatory flexibility in sales prices. Prices remain unchanged for more than 9 weeks on the average for sales price, and more than 14 weeks on average for regular prices. We also find some evidence of asymmetric price rigidity, although limited and not statistically significant within the constraint of the limited dataset. The patterns suggest that both store and category level factors could be important sources of variation of price rigidity. This calls for more research into their respective roles.
Standard macro models typically assume that producers sell goods directly to final consumers, while, in reality, the distribution network or vertical structure from a manufacturer to a consumer takes various forms. The boundary of firms, or to what extent a firm wishes to extend its distribution or manufacturing process is not a trivial issue when firms develop sourcing strategies. A substantial number of recent studies in international trade have demonstrated systematic patterns in intra-firm trade patterns and price patterns. Inclusion of vertical chains possibly generates frictions by means of double-marginalization problem, asymmetric information and coordination issues, while the choice of vertical structure is an endogenous choice of transaction cost minimization and contractibility. The first part of work discusses the price patterns by documenting several facts about price rigidity using a large grocery retail data set. The role of retailers has been completely neglected in standard macro pricing models. However, consumers seldom interact with manufacturers directly, especially for grocery items. The assumption that retail level is negligible would be innocuous only if the wholesale price dynamics is similar to retail price dynamics. That is, only when retailers fully pass through the wholesale price to consumers and do not influence the prices that have been set by manufacturers would this assumption make sense. Using detailed information of weekly price and cost from a major retailer store that operates across the United States, we find strong evidence that retail price dynamics are completely different from manufacturer price dynamics. We find two main reasons for why retail prices cannot fully reflect wholesale prices. First, retailers cannot do so because retailers face costs of their own aside from wholesale price. Second, retailers react to variations in demand more directly than wholesalers. Pass-through rate of retailer cost (including wholesale price and extra costs to retailers) to retail price is incomplete. We also find that (1) retail pass-through rate is incomplete, (2) retail pass-through rate and retail price rigidity is negatively correlated, (3) categories with higher retail mark-up show lower pass-through rate, (4) price rigidity is heterogeneous across categories, (5) competition within a category shows positive correlation with pass-through rate, but the correlation is less obvious in the scatter plots and (6) retail price duration is shorter than wholesale price duration, while retail price duration is longer than retail cost duration. In a simple model where retailers play non-neutral role, we can successfully explain the empirical findings, while models with neutral retailers or no retailers fail to explain the findings. The second part of work discusses the relationship between the vertical structure and the price rigidity. In the job market paper, "Vertical Integration and Retail Pricing Facts for Macroeconomists: Private Label vs. National Brand" (co-authored with Nicholas Li), we propose to extend this analysis to retail behavior and also into closed economy using a data set that contains prices and wholesale costs for a retail chain that operates in the United States. The retailer owns numerous brands that are sold in its stores - ownership in this case implies control over branding, marketing and packaging in all cases and in many cases control over manufacturing as well. We call these private labels and consider equivalent to intra-firm in open macro literature. Beyond generalizing the findings of previous studies to the retail sector and a different data set, the significant growth of store-brands makes the impact of vertical integration in retail on intra and inter-national pricing behavior of independent interest. By analyzing the main dimensions of pricing (duration, cost pass-through and synchronization), we find that the private label goods show shorter price duration, greater cost shock pass-through and greater synchronization of price changes than national brands counterpart. These findings are consistent with previous literature using trade dataset. We compare two existing models that can potentially explain these facts -one featuring symmetric retail demand but different vertical structures/double-marginalization, and the other featuring demand asymmetry and price discrimination as a motive for sales to find evidence that two models are complementary. If vertical structure is endogenous, with vertically integrated lower-priced products gaining market share for product categories, we argue that it can serve as a potential multiplier for demand-based induced changes in retail pricing behavior. One example that shows retailers' non-neutral role in price-setting mechanism is the existence of sales at retail level. With a recent surge of micro-level data sets from various sources, researchers have been able to examine price dynamics at a disaggregate level and to test previously established macro-pricing models. A notable feature of price dynamics across all of these data sets is significant heterogeneity across products and sectors in measured pass-through and frequency due to temporary discounts, or sales. Previous studies have demonstrated that the retailer is largely responsible for the timing and size of temporary discounts. Sales prices behave qualitative and quantitatively different from regular prices. Yet, researchers have not reached a conclusion whether or not and how to incorporate intermittent price into crucial issues, such as, macro price-setting models and price index constructions. The core of the question is whether sales have any implications for business cycle and monetary neutrality. The question is also intimately related to how economic agents respond to shocks - how retailers adjust their profit-maximizing strategies, how consumers adjust their consumption patterns in response to cost shocks. The third chapter of work, "On the Cyclicality of Effective Prices" with Professors Yuriy Gorodnichenko and Olivier Coibin directly tackles this issue. We study the cyclical properties of sales, regular price changes and average prices paid by consumers in a dataset containing prices and quantities sold for numerous retailers across a variety of U.S. metropolitan areas. Both the frequency and size of sales fall when unemployment rates rise and yet the inflation rate of average prices paid by consumers declines with higher unemployment. This discrepancy can be reconciled by consumers reallocating their expenditures across retailers, a feature of the data which we document and quantify. The results point toward a cyclical mis-measurement of inflation which can account for part of the "missing disinflation" during the Great Recession.
This dissertation consists of three essays on the empirical analysis of grocery retailing and consumer shopping behavior. The first chapter focuses on supermarket loyalty programs and their impact on the demand for private labels. Supermarkets often link loyalty rewards to private label purchases, What are supermarkets' motivations to do this? This empirically examines this link using scanner data on grocery purchases of French households and structural methods of demand estimation. Results are consistent with the industry lore: private labels are less valued products relative to quality-equivalent national brands. However, members of loyalty programs have a larger valuation of private labels than non-members. Moreover, the more prone to subscribe to LPs a customer is, the larger her sensitivity to a price increase and the weaker the expected effects on the demand for private labels. The second chapter, joint with Daniel Herrera Araujo, is inspired by a number of theory papers showing that when shopping costs, that rationalize the observed heterogeneity in consumer shopping patterns, are introduced in economic analysis, policy conclusions can change dramatically. We structurally identify consumer shopping costs using scanner data on grocery purchases of French households. We present a model of demand for multiple stores and products consisting of an optimal stopping problem in terms of individual shopping costs. This rule determines whether to visit one or multiple stores at a shopping period. We then estimate the parameters of the model and recover the distribution of shopping costs. We quantify the total shopping cost in 18.7 € per store sourced on average. This cost has two components, namely, the mean fixed shopping cost, 1.53 € and mean total transport cost of 17.1 € per trip. The third chapter empirically examines the role of nonlinear contracts between manufacturers and retail stores, and Resale Price Maintenance (RPM) on nominal price stability. According to the literature the incomplete transmission of costs shocks into retail prices is explained by the existence of markup adjustment and price adjustment costs. The vertical conduct of the industry and the use of RPM can introduce further price stickiness or reinforce it. I present a structural model of vertical relations allowing for two-part tariffs and RPM, and accounting explicitly for retail price rigidity by including fixed costs of price adjustment in retailer's profit function. Using micro data on sales of breakfast cereals from a large supermarket chain in Chicago, I estimate demand, retrieve margins, and compute bounds for retail price adjustment costs. I find that these costs lie between 1.6% and 3% of its total revenue a year, on average.
Showcasing fuzzy set theory, this book highlights the enormous potential of fuzzy logic in helping to analyse the complexity of a wide range of socio-economic patterns and behaviour. The contributions to this volume explore the most up-to-date fuzzy-set methods for the measurement of socio-economic phenomena in a multidimensional and/or dynamic perspective. Thus far, fuzzy-set theory has primarily been utilised in the social sciences in the field of poverty measurement. These chapters examine the latest work in this area, while also exploring further applications including social exclusion, the labour market, educational mismatch, sustainability, quality of life and violence against women. The authors demonstrate that real-world situations are often characterised by imprecision, uncertainty and vagueness, which cannot be properly described by the classical set theory which uses a simple true–false binary logic. By contrast, fuzzy-set theory has been shown to be a powerful tool for describing the multidimensionality and complexity of social phenomena. This book will be of significant interest to economists, statisticians and sociologists utilising quantitative methods to explore socio-economic phenomena.
On the question of whether prices are higher in poor, urban neighborhoods, the prior research is decidedly mixed. This paper revisits the question by analyzing unpublished price-level data collected by the Bureau of Labor Statistics for construction of the Consumer Price Index. Using this large, statistically representative sample of stores in poor and affluent neighborhoods, I first estimate if a price difference exists. I then empirically test the major arguments in support of disparate prices such as differences in quality, operating and consumer search costs. I also explore the relationship between pricing strategies and the racial and ethnic composition of poor neighborhoods. I find that market prices are up to 6 percent less in poor neighborhoods after controlling for a variety of covariates. In addition, I find that poor, predominantly white and Hispanic neighborhoods experience significant discounts, while market prices in poor, predominantly black neighborhoods are comparable to those in affluent white areas.
Food Chains: Quality, Safety and Efficiency in a Challenging World addresses the many issues facing European food producers and other food chain stakeholders, who endeavour to improve their competitive position in a highly competitive world food market. The Food Chain is one of the main economic pillars in Europe, providing employment and opportunities for economic development in rural areas. It is therefore imperative to continuously monitor the changes that affect the sector, in order to allow stakeholders to respond promptly and effectively to the new market conditions. Adjusting to the new market involves new technology, globalization, demographic and social changes within a challenging market environment. In order to adopt these new market parameters, food chain stakeholders need to adapt their activities in order to gain in terms of effectiveness and efficiency. This book was originally published as a special issue of Food Economics - Acta Agriculture Scandinavica, Section C.
