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Federal Reserve Bank of Philadelphia
Working Papers
Relative price dispersion: evidence and theory
Greg Kaplan
Guido Menzio
Leena Rudanko
Nicholas Trachter
Abstract

REVISED: 8/1/18: We use a large data set on retail pricing to document that a sizable portion of the cross-sectional variation in the price at which the same good trades in the same period and in the same market is due to the fact that stores that are, on average, equally expensive set persistently different prices for the same good. We refer to this phenomenon as relative price dispersion. We argue that relative price dispersion stems from sellers’ attempts to discriminate between high-valuation buyers who need to make all of their purchases in the same store and low-valuation buyers who are willing to purchase different items from different stores. We calibrate our theory and show that it is not only consistent with the extent and sources of dispersion in the price that different sellers charge for the same good, but also with the extent and sources of dispersion in the prices that different households pay for the same basket of goods and with the relationship between prices paid and the number of stores visited by different households.


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Greg Kaplan & Guido Menzio & Leena Rudanko & Nicholas Trachter, Relative price dispersion: evidence and theory, Federal Reserve Bank of Philadelphia, Working Papers 16-6, 29 Feb 2016, revised 01 Aug 2019.
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Keywords: Price dispersion; Equilibrium product market search; Retail pricing; Goods
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