NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Best Prices: Price Discrimination and Consumer Substitution

Judith A. Chevalier, Anil K. Kashyap

NBER Working Paper No. 20768
Issued in December 2014, Revised in January 2018
NBER Program(s):Industrial Organization, Monetary Economics, Productivity, Innovation, and Entrepreneurship

We propose a method for aggregating prices 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 aggregation strategies 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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