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