Study Finds National Retail Chains Respond Differently to Local Cost Shocks

A new study reveals that national retail chains respond differently to local cost shocks versus demand changes, adjusting prices only at affected stores. The research finds that chains maintain uniform prices across stores in response to demand fluctuations, but not cost changes.

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Nitish Verma
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Study Finds National Retail Chains Respond Differently to Local Cost Shocks

Study Finds National Retail Chains Respond Differently to Local Cost Shocks

A new study by economists Andrew Butters, Daniel Sacks, and Boyoung Seo reveals that national retail chains respond differently to local cost shocks compared to local demand changes. The research shows that when faced with excise tax increases, these chains change prices only at the affected stores, without any spillover effect on unaffected locations.

Why this matters: Understanding how national retail chains respond to local cost shocks has significant implications for tax policy, as it can influence the effectiveness of different tax policies in altering consumer behavior. This study's findings can inform policymakers on how to design tax policies that achieve their intended goals.

National firms operating across multiple geographic areas account for a significant portion of the economy, representing 70% of sales and payroll, and 68% of total employment. When local demand fluctuates, these firms tend to maintain uniform prices across their stores, with little change in pricing. However,the study findsa stark contrast in how they handle local cost changes.

Butters, Sacks, and Seo's findings support the textbook model of pricing when it comes to cost shocks. "Why do stores that are part of a national chain behave one way for local demand changes but another way for local cost changes?" questions Amit Batabyal, highlighting the asymmetric response puzzle raised by the study.

The research builds upon previous work by Stefano DellaVigna and Matthew Gentzkow, who demonstrated that retail prices remain uniform in response to demand changes. The lack of a clear explanation for the asymmetric response to demand and cost changes has important implications for tax policy, as the statutory incidence of taxes may influence their economic incidence and shape the effectiveness of different tax policies in altering consumer behavior.

The study byButters, Sacks, and Seo sheds light on the complex pricing strategies employed by national retail chains and raises important questions for further research. As these firms continue to dominate the economic landscape, understanding their response to local market conditions will be crucial for policymakers and economists alike.