Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Thursday, August 16, 2012

Price dispersion, search costs and consumers and sellers heterogeneity in retail food markets

Posted by D. Daniel Sokol

Giovanni Anania (University of Calabria, Italy) and Rosanna Nistico (University of Calabria, Italy) discuss Price dispersion, search costs and consumers and sellers heterogeneity in retail food markets.

ABSTRACT: Price dispersion, i.e. a homogeneous product being sold at different prices by different sellers, is among the most replicated findings in empirical economics. The paper assesses the extent and determinants of spatial price dispersion for 14 perfectly homogeneous food products in more than 400 retailers in a market characterized by the persistence of a large number of relatively small traditional food stores, side by side large supermarkets. The extent of observed price dispersion is quite high, suggesting that monopolistic competition prevails as a result of the heterogeneity of consumers and services offered. When prices in an urban area (where the spatial concentration of sellers is much higher and consumer search costs significantly lower) are compared with those in smaller towns and rural areas, differences in search costs and the potentially higher degree of competition do not yield lower prices; quite the contrary, they are, on average, higher in the urban area for 11 of the 14 products considered. Supermarkets proved to be often, but not always, less expensive than traditional retailers, although average savings from food shopping at supermarkets were extremely low. Finally, the results of the study suggest that retailers have different pricing strategies; these differences emerge both at the firm level and for supermarkets within the same chain. The results presented in the paper suggest that what is important in explaining price dispersion is the contemporaneous heterogeneity of retailers (in terms of services) and consumers (in terms of search and shopping preferences), which makes it possible for a monopolistic competition structure of the market to emerge and for small traditional food retailers to remain in business.

http://lawprofessors.typepad.com/antitrustprof_blog/2012/08/price-dispersion-search-costs-and-consumers-and-sellers-heterogeneity-in-retail-food-markets.html

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