Most monthly variation in average unit price is due to changes in the frequency and size of sales and is not reflected in the CPI. Fact (4) is established in Section 1.6, which studies how grocery and drug chains use sales to respond to large changes in demand.
Data
If a UPC was not scanned at a particular store in a given week, then that week's UPC is missing from the data. I guess if an item hasn't been scanned for 9 weeks or more then it wasn't available.
Dening the Regular Price and Identifying a Sale
An item is considered to be on sale if the observed price is at least five percent below the regular price.6. The Kehoe-Midrigan filter occasionally selects the lowest frequently charged price as the regular price.
Summary Statistics
The vertical axis is the fraction of weeks of items on sale, and the horizontal axis is the average annual revenue (as shown in Tables 1.3 and 1.4). Notes: This figure shows the average share of weeks in sales by decile of average weekly revenue (within store).
Sales and Aggregate Price Adjustment
Non-seasonal fluctuations in sales (frequency, size and volume ratio) explain half or more of the variation in unit price. In the DFF data, the difference between unit price and regular price is much more volatile.
Store Response to Reductions in Revenue
Nevertheless, we see an increase of four percentage points in the difference between regular price and unit price during the recession of 1991. In the figures above, we observe two occasions when there would have been downward pressure on prices (coming from the demand side). ) and in both cases unit price fell relative to regular price. However, deviations in the timing of these changes relative to contraction dates leave us with an unclear picture of the role sales play in aggregate price adjustment.
The red lines indicate how I identify the timing of changes in the binary demand shock variables used in the regressions. I think the demand shock happened in the quarter before the 10% year-over-year decline in moving average revenue. N egit(P osit) takes the value of zero before the occurrence of a negative (positive) demand shock and then takes the value of one in the quarter in which the shock occurs and every quarter thereafter, unless the shock in the opposite direction occurs later.
Using the procedure described above, I find that 70 of the 124 chains in the data experience negative demand shocks at some point during the sample period. In the first specication, the demand shocks are represented by the binary variables N egit and P osit. In the long run, the ratio of the unit price to the normal price returns to its original level.
Synchronization of Sales
A degree of synchronization is evident, particularly for carbonated beverages, where it is not uncommon for a single product to be on sale in at least 40% of stores. However, it is extremely rare that a product is for sale in more than half of the stores, regardless of category. It is almost never the case that a single item is on sale in 75% or more of the stores.
There is evidence that stores tend to put products on sale in the week following a manufacturer's coupon drop (Nevo and Wolfram, 2002) but this type of synchronization has little to do with particular supply and demand shocks. I measure within-manufacturer synchronization by calculating the share of items on sale within each vendor-store-week combination. From the set of vendor-store-week combinations, I only keep those that contain at least 5 different items, one of which was on sale.
These results do not support the idea that sales are the result of temporary reductions in the marginal cost of production. 18. The share of items on sale in a given store-week category is usually below 25% and almost never above 40%. 18 Sales may be the result of temporary reductions in the wholesale price of items sold by grocery stores.
Concluding Discussion
Exceptions to this phenomenon are noted in the literature during weeks of predictably high demand, such as eggs in the week before Easter and tuna during the carnival season (Hosken and Reien, 2004; Chevalier et al., 2003).
APPENDIX
In the simplest terms, the BLS collects a sample of prices each month and then aggregates them in two steps. This means that adjustments to the average unit price due to high-frequency substitution are not reflected in the CPI. Since the price index is primarily used to measure the change in the price level, the xing weights are not a problem if sales characteristics are static.
However, if the characteristics of sales change over time, then it is unclear that a fixed-weight geometric mean will accurately reflect changes in the price level due to sales. For this example, I just want to highlight the impact of changes in sales characteristics on the average price paid. In practice, an increase in the average discount is likely to correspond to an increase in the quantity ratio.
On the other hand, increasing the frequency of sales may reduce the volume ratio and the effects would cancel each other out. The only difference between these two indices occurs when grouping by week in the store-product-month cell. Specifically, I aggregate the CPI item indices corresponding to the product categories contained in the scanner data sample.
A MODEL OF SALES 2.1 Introduction
- Macro Models with Sales
- Micro Models of Sales
- A Model of Price Dispersion with Two Prices
- Conclusion
Neither model leads to cyclical changes in the total fraction of income from sales. In a two-price equilibrium, the number of consumers visiting low-price stores in the low-demand state is µ(1−S)N buyers plus SN buyers. The number of consumers who visit a high-price store in the high demand state is (1−µ) (1−S)N+δN and the capacity of high-price stores is (1−µ)L.5 The third equilibrium state is (1−µ) ( 1−S)N+δN = (1−µ)L.
Setting a higher price is uncertain because no consumers will visit such a store in the low demand state. In the Appendix, I show that an equilibrium of the type described above exists as long as demand is neither too elastic nor inelastic at the high price. More units are bought at the high price when demand is high, so the average unit price is higher in the high demand state.
Output measured by the amount of capacity sold is N D(ph) in the low demand state and (1 +δ)N D(ph) in the high demand state. She will sell to N((1−S)(1−µ) +δ)buyers in a state of high demand because all other stores will be sold out. A store that would increase by a small amount would no longer sell all of its capacity in a low demand state at a low price.
SALES AND FIRM ENTRY: THE CASE OF WAL-MART 1 3.1 Introduction
A Repeated Game of Retail Price Competition with Firm Entry
There are two types of customers who buy a homogeneous basket of goods from one of the rms in each period as long as the price is less than or equal to r. The first type of customer is loyal to one of the established rms and will only buy the basket from this rm. Because switchers prefer the incumbents, rmC must charge a price lower than the incumbents' minimum price to attract customers.
Here is a demand parameter that represents the opportunity cost of visiting rmC instead of A or B (for example, the cost per unit distance of getting to C). Firms A and B will sell baskets to their loyal consumers and the incumbent with the lower price of the two will sell to the switchers who do not buy from rmC.7. 6We also take a different approach to proving the existence of the kind of equilibrium we are interested in.
Requiring the entrant to play a best response yields a simple equilibrium where only the incumbents need punishment to support the equilibrium path.8 From this set of pure strategy equilibria, we focus on the one that maximizes the discounted benefits to the incumbents. Once the new entrant arrives, the equilibrium strategy that maximizes the incumbents' joint benefits involves the incumbents oscillating and switching prices between the monopoly price,r, and a lower price,¯r. This way, they are still able to retain some price-sensitive shoppers while continuing to extract monopoly power from their loyal customers some of the time.
Empirical Analysis
Notes: Average distance is the simple average across stores of the driving distance to the nearest Wal-Mart. This figure illustrates that sales frequency increases as Wal-Mart enters the market. For example, in October 1991, a 45 percent decrease in the average distance to Wal-Mart (from 20 to 11 miles) corresponds to a 50 percent increase in the trend component of sales (from 12 to 18 percent).
This graph shows that chain-wide sales frequency increased rapidly after Wal-Mart entered. The dependent variable (%Sales) is the percentage of products on sale at store j during week t, and the independent variable (Distjt) is the driving distance in miles from store j to the nearest Wal-Mart per week. The estimates mean that the average decrease in driving distance to the nearest Wal-Mart (35 miles) increased the share of products on sale in a store by 1.05 percentage points.
The results presented above show that DFF increased its sales frequency in response to Wal-Mart's entry. A negative coefficient of β1 means that the average frequency of sales in the entry category would increase in response to a decrease in the distance to the nearest Wal-Mart. Saleijt=β1Distjt+β2Distjt×Sharei+β3Qt+cij+eijt (3.3.3) Here, the effect of competition with Wal-Mart depends on category (via β1) as well as product popularity (via β2).
Notes: This figure shows the estimated effect of a 35-mile decrease in distance to Wal-Mart (approximate sample mean) on sales frequency for each of the three stock percentiles by category. We also examine each store's average p-cp markup to provide a view of the overall price response to Wal-Mart.
