Benjamin Eden

Rigid Prices: Evidence from U.S. Scanner Data

This paper is part of the growing literature that uses micro-data to distinguish among alternative price behavior models and provide some measurements essential for calibration exercises. We use weekly grocery US scanner data and attempt to distinguish among three types of models: State dependent menu cost models, time dependent sticky price models and sequential trade models. Our main findings are: 1. The probability that a store will change its price is increasing in the distance from the mean price charged by other stores and is decreasing in the time since the last price change; 2. The time between price changes is negatively autocorrelated; 3. There is a positive relationship between the standard deviation of transaction prices (across units) and the surprise in sales. State dependent menu cost models say that only the level of the real price matters. Our first finding is that the probability of repricing does depend on the relative price but unlike the prediction of the theory other variables also matter. State dependent models suggest that stores whose (S,s) band is relatively wide will make large nominal price jumps relatively infrequently. This suggests that the time between price changes should exhibit positive serial correlation. We actually find a negative autocorrelation. Time dependent models assume that a store change its price every N periods. This suggests that the probability of making a price change should increase with the time since the last change. We find that the probability actually decreases with the time since the last change. The uncertain and sequential trade model says that when the realization of demand is low only low priced goods are sold, but when the realization of demand is high both low priced and high priced goods are sold. This suggests a positive relationship between the standard deviation of transaction prices (across units) and the surprise in the number of units sold. The correlations in the data are consistent with this prediction.

Price Dispersion and Demand Uncertainty: Evidence from US Scanner Data

I use the Prescott (1975) hotels model to explain variations in price dispersion across goods sold by supermarkets in Chicago. I extend the theory to accounts for the monopoly power of chains and for non-shoppers. The main empirical finding is that the effect of demand uncertainty on price dispersion is highly significant and quantitatively important: More than 50% of the cross sectional standard deviation of log prices is due to demand uncertainty. I also find that price dispersion measures are negatively correlated with the average price but are not negatively correlated with the revenues from selling the good (across stores and weeks) and with the number of stores that sell the good.

Discreteness and Nominal Rigidity: Do Supermarket Prices Move Too Much?

We assess the ability of the cross sectional price distribution to react to shocks from the point of view of a Prescott “hotels” type model, using a sample of 435 products in 75 stores over 121 weeks. We argue that the cross sectional distribution is flexible in spite of the price repetition observed in the data. From the point of view of our model the question is why prices move so much. We outline the possibility that prices are used to manage inventories.

PRICE DISPERSION AND DEMAND UNCERTAINTY: EVIDENCE FROM U.S. SCANNER DATA: PRICE DISPERSION AND UNCERTAINTY

I use the Prescott (1975) hotels model to explain variations in price dispersion across items sold by supermarkets in Chicago. The effect of uncertainty about aggregate demand on price dispersion is highly significant and quantitatively important: My estimates suggest that more than 40% of the cross‐sectional standard deviation of log prices is due to demand uncertainty. I also find that price dispersion measures are negatively correlated with the average price but are not negatively correlated with the revenues from selling the good (across stores and weeks) and with the number of stores that sell the good.

The Welfare Cost of Inflation and the Regulations of Money Substitutes

This paper studies the possibility of using financial regulation that prohibits the use of money substitutes as a tool for mitigating the adverse effects of deviations from the Friedman rule. When inflation is not too high regulation aimed at eliminating money substitutes improves welfare by economizing on transaction costs. The gains from regulation depend on the distribution of income and the level of direct taxation. The area under the demand for money curve is equal to the welfare cost of inflation only when there are no direct taxes and no proportional intermediation cost: otherwise, the area under the demand curve overstates the welfare cost of inflation when money substitutes are not important and understates the welfare cost when money substitutes are important.

Demand Uncertainty and Efficiency

I use a flexible price version of the Prescott (1975) “hotels�? model to study a dynamic model that allows for storage. The formulation follows the standard competitive analysis tradition with a non-standard definition of markets: The set of markets that open depends on the state of demand. I use three planner’s problems to characterize various efficiency concepts that are used in the literature, but focus on the problem of a “weak�? planner that faces the same constraints as the sellers in the model. From the point of view of the “weak�? planner, the equilibrium outcome is efficient if the probability of becoming active is the same for all buyers. In general, the equilibrium outcome is not efficient from the point of view of a planner that has more information than the sellers in the model except for the case in which the costs of delaying trade are not important. The cost of delay is also relevant for price dispersion: Lower cost of delays may lead to lower price dispersion.

Consumption Smoothing and the Equity Premium

The paper investigates the role of the Intertemporal Elasticity of Substitution () in determining the equity premium. This is done in an overlapping generations economy populated by agents that live for 2 periods and maximize a Kihlstrom-Mirman expected utility function. The equity premium depends both on the demand for smoothing as measured by the inverse of and on risk aversion but the first seems to play a more important role. The paper also attempts to understand the difference between the predictions of a 2 periods Kihlstrom-Mirman expected utility and the predictions of a 2 periods Epstein-Zin-Weil utility.