Price Dispersion and Informational Frictions: Evidence from Supermarket Purchases

Pierre Dubois and Helena Perrone

No 10906, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Traditional demand models assume that consumers are perfectly informed about product characteristics, including price. However, this assumption may be too strong. Unannounced sales are a common supermarket practice. As we show, retailers frequently change position in the price rankings, thus making it unlikely that consumers are aware of all deals offered in each period. Further empirical evidence on consumer behavior is also consistent with a model with price information frictions. We develop such a model for horizontally differentiated products and structurally estimate the search cost distribution. The results show that in equilibrium, consumers observe a very limited number of prices before making a purchase decision, which implies that imperfect information is indeed important and that local market power is potentially high. We also show that a full information demand model yields severely biased price elasticities.

Keywords: Consumer behavior; Demand estimation; Imperfect information; Price dispersion; Price elasticities; Product differentiation; Sales; Search costs (search for similar items in EconPapers)
JEL-codes: D4 D83 L11 L66 (search for similar items in EconPapers)
Date: 2015-10
New Economics Papers: this item is included in nep-agr, nep-com, nep-ind and nep-mkt
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Citations: View citations in EconPapers (14)

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Related works:
Working Paper: Price Dispersion and Informational Frictions: Evidence From Supermarket Purchases (2018)
Working Paper: Price Dispersion and Informational Frictions: Evidence from Supermarket Purchases (2017)
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