Price Dispersion, Search, and Market Power

The purpose of the research presented in this study is to examine the relationship of price dispersion to search costs, store choice, and market power in the food-retailing sector. The study used consumer level demographic information and brand level fluid milk consumption data from 33 U.S. metropolitan areas. Overall, the study found strong evidence of search cost related strategic firm and consumer behavior. Our results show that purchase frequency has a negative and significant relationship with price dispersions and with measures of price cost margins. We also find that the price of fluid milk was an important factor in explaining whether or not consumers return to the same store. Demographic factors such as income and race were important in explaining price dispersions, which suggest different willingness to search across population sub-groups