Reference Prices and Costs in the Cross-Section: Evidence from Chile

This paper studies nominal rigidities using a novel scanner data set consisting of weekly prices, costs and quantities sold for a cross-section of retailers in Chile. Nominal rigidities are found to take the form of reference price inertia. While posted prices change every 5 weeks (on average), reference prices change every two quarters (29 weeks), on average. Frequencies of reference price adjustment are found to be systematically related to cost volatility and expenditure shares. In addition, the probability of a reference price adjustment is increasing in the markup gap. While frequencies of reference price adjustment vary systematically across chains, markups vary within narrow bounds and pass-through coe¢ cients conditional on a reference price change are high (on the order of 0.86-0.93) suggesting that movements in reference prices are closely related to movements in prices at the previous stage of the distribution chain. Synchronization of price changes across stores appears to be particularly strong across stores belonging to a given chain. Evidence on within-stores and categories synchronization is consistent with a price adjustment technology featuring economies of scope. Universidad Diego Portales, Chile (email: [email protected]). I thank Maury Obstfeld, Yuriy Gorodnichenko, Pierre-Olivier Gourinchas and Andy Rose for advice, support and encouragement. I also thank participants at the 15th Annual International Conference on Macroeconomic Analysis and International Finance, University of Crete, and the 16th Latin American and Caribbean Economic Association Annual Meeting 2011 for their comments and suggestions. I would like to especially thank TomášHavránek for detailed comments on an earlier draft. I am deeply grateful to the following individuals for their help in the process of data gathering: Jorge Carniglia, Enrique Ostalé, Andrés Solari and Javier Vergara. David Wiczer provided excellent research assistance. All remaining errors are my own.