Snap Fact: The link between online prices and inflation
Retailers adjusting prices more frequently and uniformly across locations should react faster to economic shocks, shows a recent study
Indian online retailers are under scrutiny for their pricing policies. Brick-and-mortar retailers have accused online retailers of predatory pricing, but beyond competition implications, these pricing policies could also significantly influence inflation.
According to a new National Bureau of Economic Research working paper by Alberto Cavallo of Harvard Business School, increased online competition makes retailers change prices more frequently, while keeping prices constant across geographies.
To show this Cavallo, analyses US data from The Billion Prices Project, an initiative that tracks price data from online retailers across the world. He also collects major retailer prices in more than 100 American zip-codes to examine the extent of uniform pricing.
He shows that the frequency of price changes have increased over the last decade. Between 2008 and 2010, the average duration of a price was 6.7 months, but in 2014-17 this had fallen to 3.7. Price changes are more common in electronics and household goods, sectors where online retailers have a greater market share.
According to Cavallo more frequent price changes are a result of online retailers’ algorithmic pricing strategies and the constant monitoring of competitors’ prices. Online competition also prevents brick-and-mortar retailers from charging different prices in different locations.
Taken together, Cavallo argues that retailers adjusting prices more frequently and uniformly across locations should react faster to economic shocks such as increase in fuel prices or exchange rate fluctuations. These shocks are captured by the pricing algorithms used by large retailers and are passed on to consumers, potentially leading to greater inflation. As India’s online retail market share increases, these findings are particularly pertinent for India’s policymakers.
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