Research

Inflation, Price Dispersion, and Welfare: The Role of Consumer Search

Read more at Chicago Booth Review 

[Draft] New Version (May 2024). Submitted.

In standard macroeconomic models, the costs of inflation are tightly linked to the price dispersion of identical goods. Therefore, understanding how price dispersion empirically relates to inflation is crucial for welfare analysis. In this paper, I study the relationship between steady-state inflation and price dispersion for a cross section of U.S. retail products using scanner data. By comparing prices of items with the same barcode, my measure of relative price dispersion controls for product heterogeneity, overcoming an important challenge in the literature. I document a new fact: price dispersion of identical goods increases steeply around zero inflation and becomes flatter as inflation increases, displaying a 𝚼-shaped pattern. Current sticky-price models are inconsistent with this finding. I develop a menu-cost model with idiosyncratic productivity shocks and sequential consumer search that reproduces the new fact and exhibits realistic price-setting behavior. In the model, inflation-induced price dispersion increases shoppers' incentives to search for low prices and thus competition among retailers. The positive welfare-maximizing inflation rate optimally trades off the efficiency gains from lower markups and the resources spent on search.

Online Shopping Access and Retail Pricing Behavior

[Draft] New Version (August 2024).

The rapid expansion of online shopping has reshaped traditional retail markets over the past decade. At the same time, recent studies suggest that prices in physical stores are becoming more flexible. This paper provides new empirical evidence using scanner data to show how consumers' access to online markets affects the pricing behavior of brick-and-mortar stores. By exploiting within-product variation across geographic markets, I demonstrate that a higher share of online spending is associated with increased price flexibility, smaller price adjustments, and reduced price dispersion within narrow categories of goods. I hypothesize that online shopping reduces consumers' marginal search costs, increasing retailer-level demand elasticity and driving changes in the pricing behavior of traditional stores. I find supporting evidence for this hypothesis: the effects of online shopping access are particularly strong in markets with a larger share of bargain hunters – buyers who shop online and are more likely to purchase a given product from different retail chains. A sticky-price model with sequential consumer search suggests that lower marginal search costs due to online shopping intensify competition among traditional retailers, leading to more frequent but smaller price changes and lower overall price dispersion. The calibrated model suggests that online shopping access has long-term effects on inflation dynamics by altering pricing behavior beyond a one-time reduction in markups.