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Working Paper

Small Price Responses to Large Demand Shocks


Abstract: We study the pricing response of U.S. supermarkets to large demand shocks triggered by labor conflicts, mass population relocation, and shopping sprees around major snowstorms and hurricanes. Our focus on demand shocks is novel in the empirical literature that uses large datasets of individual data to bridge micro price behavior and aggregate price dynamics. We find that large swings in demand have, at best, modest effects on the level of retail prices, consistent with flat short- to medium-term supply curves. This finding holds even when shocks are highly persistent and even though stores adjust prices frequently. We also uncover evidence of tit-for-tat behavior by which retailers with radically different demand shocks nonetheless seek to match their local competitors' pricing movements and recourse to sales and promotions.

Keywords: Demand shocks; inflation; sales; labor conflicts; mass population displacement; severe weather events;

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File(s): File format is application/pdf http://www.federalreserve.gov/pubs/feds/2014/201418/201418pap.pdf
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Authors

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2014-02-11

Number: 2014-18

Pages: 45 pages