Best Prices: Price Discrimination and Consumer Substitution
We propose a method for constructing price indices when retailers use periodic sales to price-discriminate amongst heterogeneous customers. To do so, we introduce a model in which Loyal customers buy one brand and do not strategically time purchases, while Bargain Hunters always pay the lowest price available, the "best price". We derive the exact price index and demonstrate empirically that accounting for our best price construct substantially improves the match between conventional price indices and actual prices paid by consumers. We demonstrate that our methodology improves inflation measurement without imposing an unrealistically large burden on the data-collection agency.
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Document Object Identifier (DOI): 10.3386/w20768
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