Price Dispersion and Seller Heterogeneity in Retail Food Markets

Price dispersion, i.e. a homogeneous product being sold at different prices by different sellers, is amongthe most replicated findings in empirical economics. The paper assesses the extent and determinants ofspatial price dispersion for 14 perfectly homogeneous food products in more than 400 retailers in a marketcharacterized by the persistence of a large number of relatively small traditional food stores, alongsidelarge supermarkets. The extent of observed price dispersion is quite high. When prices in an urbanarea (where the spatial concentration of sellers is higher) are compared with those in smaller towns andrural areas, differences in search costs and the potentially higher degree of competition do not yield lowerprices. Other counteracting factors, including differences in seller costs and consumer incomes, makeprices, on average, higher in the urban area for 11 of the 14 products considered. For many, but notall, the products supermarkets proved to be less expensive than traditional retailers, although averagesavings from food shopping at supermarkets were extremely low. Finally, the results of the study provideevidence that retailers have different pricing strategies and these differences also emerge for supermarketsbelonging to the same chain. The results presented in the paper suggest that a variety of factors playa role in explaining price dispersion. In addition to differences in seller costs, the contemporaneous heterogeneityof retailers (in terms of services provided) and consumers (in terms of search costs and preferences)makes the emergence of monopolistic competition possible as well as allowing small traditionalfood retailers to remain in business.