How Do National Firms Respond to Local Cost Shocks?
R. Andrew Butters, Daniel W. Sacks, Boyoung Seo
American Economic Review · 2022 · Volume 112 · Issue 5
Abstract
Recent 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.
Keywords
Firm Behavior: Empirical Analysis, Market Structure, Pricing, and Design: General, Taxation and Subsidies: Incidence, Business Taxes and Subsidies including sales and value-added (VAT), State and Local Taxation, Subsidies, and Revenue, Firm Strategy, and Market Performance: General, Retail and Wholesale Trade, e-Commerce
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