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on Industrial Organization |
| By: | Gideon Bornstein; Alessandra Peter |
| Abstract: | This paper studies the effect of nonlinear pricing on markups and misallocation. We develop a general equilibrium model of firms that are allowed to set a quantity-dependent pricing schedule—contrary to the typical assumption in macroeconomic models. Without the restriction to linear pricing, markup heterogeneity is no longer a sign of misallocation. Larger firms charge higher markups, yet the allocation of resources across firms is efficient. Further, we point to a new source of misallocation. In general equilibrium, high-taste consumers are allocated too much of each good, low-taste consumers too little. When labor supply is elastic, firms’ market power depresses aggregate labor, but this effect is independent of the level of the aggregate markup in the economy. Using micro data from the retail sector, we show that nonlinear pricing is prevalent and quantify the model. We find that the welfare losses from misallocation across consumers under nonlinear pricing are substantially larger than those from misallocation across firms under linear pricing. |
| JEL: | D4 E2 L1 O4 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33144 |
| By: | Sayag, Doron; Snir, Avichai; Levy, Daniel |
| Abstract: | We study Israel’s “price rounding regulation” of January 1, 2014, which outlawed non-0-ending prices, forcing retailers to round 9-ending prices, which in many stores comprised 60%+ of all prices. The regulation’s goals were to eliminate (1) the rounding tax—the extra amount consumers paid because of price rounding (which was necessitated by the abolition of low denomination coins), and (2) the inattention tax—the extra amount consumers paid the retailers because of their inattention to the prices’ rightmost digits. Using 4 different datasets, we assess the government’s success in achieving these goals, focusing on fast-moving consumer goods, a category of products strongly affected by the price rounding regulation. We focus on the response of the retailers to the price rounding regulation and find that although the government succeeded in eliminating the rounding tax, the bottom line is that shoppers end up paying more, not less, because of the regulation, underscoring, once again, Friedman’s (1975) warning that policies should be judged by their results, not by their intentions. |
| Keywords: | Price Rounding Regulation; Rounding Tax; Inattention Penalty; Round Prices; 9-Ending Prices; Just-Below Prices; Inflation |
| JEL: | E31 K00 K20 L11 L40 L51 M30 |
| Date: | 2024–11–19 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122733 |