DP10725 Small Price Responses to Large Demand Shocks

Author(s): Etienne Gagnon, J David López-Salido
Publication Date: July 2015
Keyword(s): Demand shocks, inflation, labor conflicts, mass population displacement, sales, severe weather events
JEL(s): E30, L11
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10725

We study the pricing response of U.S. supermarkets to large demand shocks triggered by labor conflicts, mass population relocation, and shopping sprees around major snowstorms and hurricanes. We find that these large swings in demand have, at best, modest effects on the level of retail prices, consistent with flat short- to medium-term supply curves. This finding holds even when shocks are highly persistent and even though stores adjust prices frequently. We also uncover evidence that retailers with radically different demand shocks nonetheless seek to match their local competitors' pricing movements and recourse to sales and promotions.