How Do National Firms Respond to Local Cost Shocks?
AbstractRecent research shows prices are insensitive to local demand conditions because national chains charge geographically uniform prices. We examine the price response to local cost shocks, including 68 excise tax changes, 76 sales tax changes, and other geographically based cost differences, using data on 35,151 retail stores in 96 multi-state chains. We find local cost shocks are passed through to local prices, with no spillovers to unaffected stores in otherwise affected chains, and at similar rates for national and local chains. Firms adjust local prices according to local cost changes, suggesting retailers respond asymmetrically to local cost and demand shocks.
CitationButters, R. Andrew, Daniel W. Sacks, and Boyoung Seo. 2022. "How Do National Firms Respond to Local Cost Shocks?" American Economic Review, 112 (5): 1737-72. DOI: 10.1257/aer.20201524
- D22 Firm Behavior: Empirical Analysis
- D40 Market Structure, Pricing, and Design: General
- H22 Taxation and Subsidies: Incidence
- H25 Business Taxes and Subsidies including sales and value-added (VAT)
- H71 State and Local Taxation, Subsidies, and Revenue
- L10 Market Structure, Firm Strategy, and Market Performance: General
- L81 Retail and Wholesale Trade; e-Commerce