It’s no secret that fierce competition from Amazon puts downward pressure on prices charged by Walmart and other big multichannel retailers for the same items. However, the bigger “Amazon effect” relates not to the prices themselves but to the pricing behaviors of these more traditional retailers, according to Alberto Cavallo, the Edgerley Family Associate Professor at Harvard Business School.
Cavallo, who bases his findings on a decade’s worth of pricing data, sees two notable changes with large multichannel retailers: faster price increases and more uniform pricing between disparate locations.
“It’s not about just the markup, which, to some extent, is just a temporary effect,” Cavallo says. “If competition with Amazon changes the way firms such as Walmart or Best Buy make pricing decisions, it can have much longer-lasting effects on inflation dynamics and other macroeconomic phenomena.”
“In a world with online competition, we need to reconsider what makes prices sticky, not just across time but also across locations.”
Cavallo focuses on multichannel retailers—those that have an online presence but sell most goods offline—because they are common data sources for statistical agencies. In 2010, these retailers would keep prices constant for about nine months on average. Today, that timeframe has narrowed to just three months, he says. That acceleration was especially true for categories like electronics and furniture with larger online market shares.
Prices respond more quickly to world events
The upshot, Cavallo says, is that retail prices have become less insulated from economic shocks, like changes in fuel costs or exchange rates, as retailers capture changing costs more quickly. This helps explain some of the puzzling inflation trends in recent years. It could also lead to more volatile inflation in the future.
Prices also can react quicker to policy changes and demand-side shocks. In fact, policymakers at the Federal Reserve and elsewhere are the target audience for Cavallo’s message. His research, More Amazon Effects: Online Competition and Pricing Behaviors, was prepared for the Jackson Hole Economic Symposium in 2018.
Source: Alberto Cavallo
“Price stickiness is very important for the impact of monetary policy,” Cavallo says. “When the Federal Reserve lowers interest rates to stimulate output, it hopes that prices are not going to adjust quickly. If they do, the expansionary policy will have little impact on production.”
Additionally, when prices take a long time to react, the Fed can ignore what it sees as a temporary shock, like a surge in gas prices. By the time prices react, those gas prices could’ve dropped again. But if prices are adjusting much more rapidly, those surging gas prices become more meaningful, he says.
“They need to pay more attention to these types of aggregate shocks, even if they are transitory, because they can affect retail prices much faster than was traditionally thought.”
The effect of price transparency
Cavallo’s research didn’t extend to why prices are changing more frequently, but he has some theories. Technology like pricing algorithms has cut both the labor and decision cost of price changes. Those algorithms have become more common for online merchants, and even companies that aren’t using algorithms compete against those that do and mimic the faster changes.
The second change Cavallo points to is the existence of more uniform pricing within individual chains across locations. While it’s not unusual to find the same item selling for different prices at a Walmart versus a Target, it has become unusual to find stores from the same chain selling a product for different prices in different regions or online. Cavallo attributes this to the transparency afforded by the internet and customers’ concerns about fairness.
“The web allows consumers to easily check whether retailers offer different prices across channels or locations,” Cavallo says. “So, while retailers currently have the technology to customize prices based on demographics, fairness concerns are limiting their ability to do so.”
Historically, there has been more price dispersion when it comes to food, where consumers seem more willing to accept price differences across locations. Now that Amazon is making a foray into the grocery business, that could have an interesting effect on these geographical pricing dynamics, Cavallo says.
“In a world with online competition, we need to reconsider what makes prices sticky, not just across time but also across locations,” Cavallo says, adding that these are important decisions for corporate executives wrestling with dynamic pricing. “Studying fairness concerns seems crucial to know how firms might be able to use automated pricing algorithms and similar technologies in the future.”
Cavallo is actually the source for his own data. A decade ago, while a PhD student at Harvard’s Economics Department, Cavallo began collecting pricing data to prove his home country of Argentina was lying about its inflation rate. That led him to start the Billion Prices Project, a trove of data based on online prices that produces inflation indices for more than 20 countries. Cavallo admits with a shrug that the revelation Argentina was only reporting about a third of its actual inflation rate didn’t hurt the government politically because everyone already knew it was lying. But he did win some moral victories: the Economist magazine stopped publishing the Argentinian government’s numbers in favor of Cavallo’s stats, and, when a new government took over, it relied on Cavallo’s numbers as it built a new index from scratch, since the hard drives supposedly containing the official data were nowhere to be found.
The Billion Prices Project is still growing. Now the point is not about government manipulation of statistics but about providing more real-time inflation estimates, says Cavallo, who serves as an academic advisor to the Bureau of Labor Statistics.
“Policymakers are eager to get better information,” Cavallo says. “There is a lot of interest in how these new data sources can help improve economic statistics.”
About the Author
Roberta Holland is a writer based in the Boston area.
[Image: alengo]
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Should Retailers Match Their Own Prices Online and in Stores?
Research Paper: Targeted Price Controls on Supermarket Products
Deconstructing the Price Tag
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