Sourav Ray

When Little Things Mean a Lot: On the Inefficiency of Item Pricing Laws

We study item-pricing laws (which require that each item in a store be individually marked with a price sticker) and examine and quantify their costs and benefits. On the cost side, we argue that item-pricing laws increase the retailers’ costs, forcing them to raise prices. We test this prediction using data on retail prices from large supermarket chains in the Tri-State area of New York, New Jersey and Connecticut. The Tri-States offer a unique setting—a natural experiment—to study item-pricing laws because the States vary in their use of item-pricing laws, but otherwise offer similar markets and chains operating in a close proximity to each other in a relatively homogenous socioeconomic environment. We use two datasets, one emphasizing the breadth in coverage across products and the other across stores. We find consistent evidence across products, product categories, stores, chains, states, and sampling periods, that the prices at stores facing item-pricing laws are higher than the prices at stores not facing the item pricing laws by about 25¢ or 9.6% per item. We also have data from supermarket chains that would be subject to item-pricing laws but are exempted from item pricing requirement because they use costly electronic shelf label systems. Using this data as a control, we find that the electronic shelf label store prices fall between the item-pricing law and non-item- pricing law store prices: they are lower than the item-pricing law store prices by about 15¢ per item on average, but are higher than the non- item-pricing law store prices by about 10¢ per item on average. On the benefit side, we study the frequency and the magnitude of supermarket pricing errors, which the item-pricing laws are supposed to prevent. We quantify the benefits of the IPLs by conservatively assuming that they successfully accomplish their mission of preventing all price mistakes. Comparing the costs of item-pricing laws to their benefits, we find that the item-pricing law costs are at least an order of magnitude higher than the benefits.

When little things mean a lot: On the inefficiency of item-pricing laws

Item‐pricing laws (IPLs) require a price tag on every item sold by a retailer. We study IPLs and assess their efficiency by quantifying their costs and comparing them to previously documented benefits. On the cost side, we posit that IPLs should lead to higher prices because they increase the costs of pricing and price adjustment. We test this prediction using data collected from large supermarket chains in the tri‐state area of New York, New Jersey, and Connecticut. We find that IPL store prices are higher by about 20¢–25¢ per item on average. As a control, we use data from stores that use electronic shelf labels and find that their prices fall between IPL and no‐IPL store prices. We compare the costs of IPLs to existing measures of the benefits and find that the costs are an order of magnitude higher than the upper bound of the estimated benefits.

Multicomponent Systems Pricing: Rational Inattention and Downward Rigidities

The authors examine the relative magnitude of price reductions for product systems and their constituent components (e.g., cameras, computers, monitors, lenses) and hypothesize that these price reductions systematically vary across different types of systems. The authors offer rational inattention as an explanation and document patterns of downward rigidity in online prices of computers and cameras that are consistent with this view. Their basic argument is that under certain circumstances, it is rational for consumers to ignore small price changes. This results in some price rigidity because firms would see no demand effect for small reductions. The authors suggest that this inattention systematically varies across different types of multicomponent systems, leading to specific hypotheses about sellers’ pricing behavior. They first check the validity of their theoretical arguments using data from two surveys of consumers and managers. They then examine 669,557 daily price listings for 1052 high-end cameras and computers from 102 online vendors and find evidence consistent with their predictions. Using publicly available web traffic data, the authors also find that their predicted pricing behavior is aligned with better traffic response for the firm.

Understanding Value-Added Resellers’ Assortments of Multicomponent Systems

Interconnect standards increase choices. For example, in cardiac pacemakers, the IS-1 standard enables the “pulse generator” from 6 manufacturers to be combined with the “lead set” from the other 5 to create up to 30 additional mixed-brand pacemakers. However, observed assortment additions are much smaller, which is puzzling because manufacturers in extant models have welcomed such additions to reduce price competition and increase variety. Instead, conflict with the value-added resellers that create and carry these additions is commonplace. The authors extend the literature with an analytical model showing that value-added resellers limit the number and composition of additions to gain better upstream terms. This conflict is exacerbated when “keystone” components are relatively more decisive in influencing customer choices, so their exclusion from an addition represents a larger loss. The empirical study of the multibillion-dollar auto paint refinish market finds assortment additions consistent with the authors’ predictions. The article concludes with a discussion of the role of channel support programs in ameliorating these conflicts.

Understanding Value-Added Resellers' Assortments of Multi-Component Systems

Inter-connect standards increase choices; e.g., in cardiac pacemakers, the IS-1 standard enables the “pulse generator” from six manufacturers to be combined with the “lead set” from the other five to add up to thirty additional mixed-brand pacemakers. However, observed assortment additions are much smaller, which poses a puzzle since manufacturers in extant models welcome such additions to reduce price competition and increase variety. Instead, conflict with the value-added resellers (VARs) who create, and carry these additions is commonplace. We extend the literature with our analytical model that shows VARs limit the number and composition of additions to gain better upstream terms. This conflict is exacerbated when “keystone” components are relatively more decisive in influencing customer choices, so their exclusion from an addition represents a larger loss. Our empirical study of the multi-billion dollar auto paint refinish market finds assortment additions consistent with our predictions. We conclude with discussing the role of channel support programs to ameliorate these conflicts.

Leaving the Tier: An Examination of Asymmetry in Pricing Patterns in Online High Tech Shops

We analytically illustrate that maximizing profit in a market with products that quickly degrade in price motivates market leaders to make both aggressive price increases and decreases that exceed that of the market followers, flipping between attempts to capitalize on their brand name and using capturing a large majority of the market. We examine 475,866 prices and 51,260 price changes for 810 high-tech products from 26 vendors over 283 days and show that a price premium does exist for the market leaders, implying a marginal revenue advantage, but aggressive price increases and aggressive price decreases are made by market leaders, and how market followers are unable or unwilling to competitively respond to these price changes. This research adds to the discussion of market friction, tiers, and market leaders by showing how market leaders may be motivated to drastically cut prices cuts, and how such price cuts can be profit maximizing.

Leaving the Tier: Asymmetry in Pricing Patterns in Online High Tech Shops

Using simulation and empirical analysis, we examine asymmetry in pricing patterns within hightech markets, where market leaders lead in both price increases and decreases. We examine 475,866 prices and 51,260 price changes for 810 high-tech products from 26 vendors over 283 days. We show that price premiums exist for the market leaders, but these leaders also engage in aggressive price decreases where market followers are unable or unwilling to competitively respond. Surprisingly, we show that large price premiums and market power can motivate a market leader to abandon high price premiums since capturing the entire market at a lower price can lead to greater profits. This research adds to the discussion of market friction and tiers by demonstrating that, in high-tech industries, drastic price cuts from market leaders that go beyond barriers to entry and loss leading can be profit maximizing.