How do Retailers Adjust Prices?: Evidence from Store-Level Data

Abstract

Recent theoretical work on retail pricing dynamics suggests that retailers periodically hold sales periodic, temporary reductions in price, -even when their costs are unchanged. In this paper we extend existing theory to predict which items will go on sale, and use a new data set from the BLS to document the frequency of sales across a wide range of goods and geographic areas. We find a number of pricing regularities for the 20 categories of goods we examine. First, retailers seem to have a “regular” price, and most deviations from that price are downward. Second, there is considerable heterogeneity in sale behavior across goods within a category (e.g. cereal); the same items are regularly put on sale, while other items rarely are on sale. Third, items are more likely to go on sale when demand is highest. Fourth, for a limited number of items for which we know market shares, products with larger market shares go on sale more often. These final three observations are consistent with our theoretical result that popular products are most likely to be placed on sale.

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