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

Bergen, Mark and Levy, Daniel and Ray, Sourav and Rubin, Paul and Zeliger, Ben (2006): When Little Things Mean a Lot: On the Inefficiency of Item Pricing Laws.

Abstract

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 cost of pricing as well as the cost of 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, which offer a unique setting because these states vary in their use of IPLs, but otherwise offer geographical proximity with each other and similar markets, supermarket chains, and socioeconomic environments. We find that IPL store prices are higher by about 20¢–25¢ or 8.0%–9.6% per item on average, in comparison to non-IPL stores. As a control, we use data from stores that are exempt from IPL requirements (because they use electronic shelf labels), and find that their prices fall between IPL and non-IPL store prices. To assess the efficiency of IPLs, we compare these costs to existing measures of the benefits of IPLs which are based on measurements of the frequency and the magnitude of pricing errors the IPLs are supposed to prevent. We find that the costs of IPLs are an order of magnitude higher than the upper bound of these estimate benefits.

• Item Type: MPRA Paper
• Institution: University of Minnesota, Bar-Ilan University, McMaster University, Emory University, and Cornell University
• Language: English
• Keywords: Item Pricing Law; Cost of Item Pricing Law; Cost of Price Adjustment; Menu Cost; Retail Pricing
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; K - Law and Economics > K2 - Regulation and Business Law > K20 - General; L - Industrial Organization > L8 - Industry Studies: Services > L81 - Retail and Wholesale Trade ; e-Commerce; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation

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