DellaVigna and Gentzkow (2019, QJE) - Uniform Pricing in U.S. Retail Chains

Summary

This paper addresses a key question: Why do large U.S. retail chains set uniform prices across their stores despite significant differences in local market conditions? Understanding this is crucial because uniform pricing can lead to substantial profit losses for firms and may also have broader implications for consumer welfare and inequality. By examining these effects, the paper sheds light on how pricing strategies impact both business outcomes and economic policy considerations.

The authors use store-level scanner data from the Nielsen-Kilts Retail Panel, covering 1,365 products across 9,415 food stores, as well as additional data from 9,977 drugstores and 3,288 mass-merchandise stores. They also consider expanded product sets of up to 40,000 items. The standard price measure is calculated as the ratio of weekly revenue to units sold, allowing for an analysis of pricing uniformity. The descriptive evidence reveals prices within retail chains are highly uniform, with far less variation than between chains, despite differences in consumer income and competition. Prices only increase by 0.47% for every $10,000 rise in income within chains, showing limited responsiveness to local conditions. Product assortments are also consistent within chains but differ more between chains. This uniformity is seen across various store types, indicating a widespread retail pricing strategy.

To understand the implications of uniform pricing, the paper employs a constant-elasticity model of demand, estimating the variation in price elasticities both within and between chains. Additionally, the model uses an instrumental variable to compare observed pricing practices to an optimal pricing benchmark, assessing potential profit losses due to uniform pricing. The findings show that uniform pricing leads to significant profit losses, as actual prices deviate from the profit-maximizing optimal prices. In addition, the analysis of store mergers reveals that stores promptly adopt the pricing strategies of their new chain, providing evidence for uniform pricing and offering a natural experiment to understand long-run price elasticities.

Critiques

One critique of the paper is that while it provides strong evidence for uniform pricing and its consequences, the reasons behind this practice are not conclusively established. The paper mentions managerial inertia and brand image concerns as potential explanations, but the analysis does not deeply explore these mechanisms or quantify their impact on the decision-making process. As a result, the findings raise questions about the underlying factors driving uniform pricing without offering a fully developed theoretical or empirical framework for understanding these motivations.

Another possible limitation of the paper is its focus on short-run elasticities when estimating optimal pricing, which may not fully capture the long-term price dynamics and consumer behavior adjustments. Although the authors attempt to address this through an event-study analysis of store mergers, it is possible that the short-run and long-run price elasticities differ significantly, affecting the conclusions about the profitability of flexible pricing.