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Essays on retail price movements

University of British Columbia

The central questions asked in this thesis are (i) whether retail prices are sticky or not, and (ii) what economic factors are crucial for explaining retail price movements. In the second chapter, I first examine the predictions of two representative economic models to explain price movements - a time-dependent pricing model and a state-dependent pricing model. This chapter is different from past studies with respect to its micro data set including cost information. The results of this chapter based on descriptive statistics empirically support the state-dependent pricing model in explaining the observed retail price movements. Moreover, using reduced-form probit estimations to explain price changes, I show that the frequency of price changes is significantly affected by the degree of competitions among brands. The third chapter examines a state-dependent pricing model in the presence of fixed adjustment costs of prices - menu costs. A model with menu costs has the potential to explain an important characteristic of retail price movements: prices discretely jump. This chapter shows that the assumption about market structure is crucial in identifying menu costs. Specifically, prices in a tight oligopolistic market can be more rigid than those in more competitive market such as monopolistically competitive one. If so, the estimates of menu costs under the assumption of monopolistic competition in past studies are potentially biased upwards due to the rigidity from strategic interactions among brands. In addition, I show the estimate could be biased downwards without controlling for unobserved promotional activities. Developing and estimating a dynamic discrete-choice model with multiple agents to correct these potential biases, this chapter provides empirical evidence that menu costs as well as strategic interactions are important in explaining the observed degree of price rigidity in weekly price movements of a typical retail product, graham crackers. The fourth chapter provides a survey of the recently proposed estimators for structural estimations in dynamic discrete choice games. This survey focuses on two-step estimators, which overcome the computational costs that used to be unavoidable in the course of structural estimations of dynamic discrete-choice models.

Text

2011-02-03

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http://hdl.handle.net/2429/31081

Economics

University of British Columbia

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