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
imperfect information; price dispersion; sales; search costs; product dif- ferentiation; consumer behavior; demand estimation; price elasticities;
JEL codes
- D4: Market Structure and Pricing
- D83: Search • Learning • Information and Knowledge • Communication • Belief
- L11: Production, Pricing, and Market Structure • Size Distribution of Firms
- L66: Food • Beverages • Cosmetics • Tobacco • Wine and Spirits
Reference
Pierre Dubois, and Helena Perrone, “Price Dispersion and Informational Frictions: Evidence from Supermarket Purchases”, TSE Working Paper, n. 15-606, October 2015, revised September 2017.
See also
Published in
TSE Working Paper, n. 15-606, October 2015, revised September 2017