Macroeconomics Seminar - Wing Feng (National Taiwan Normal University)

Room 315, Level 3, FBE Building, 111 Barry Street, Carlton

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Yusuf Mercan

yusuf.mercan@unimelb.edu.au

T: +61 3 8344 0470

Title: Price Dispersion, Competition and Revenue Productivity in the Retail Grocery Sector

Abstract: Several studies have documented a decline in labor income share in the US. However, all empirical studies have focused primarily on the manufacturing sector and welfare consequences associated with these changes are often analyzed under the assumptions of homogeneous firms and perfect or monopolistic competition. This paper focuses instead on the retail grocery sector, where over 90 percent of the revenue is generated by the cost of goods sold and labor ONLY. Using data from the IRI Academic Marketing Sector and the Census of Retail Trade, we document three facts: (1) Transacted price dispersions have increased by 16% from 2001 to 2011; (2) Revenue productivity in the grocery sector has increased by over 40% while labor share has declined from 66% to 53% (3) An accelerated reallocation of market share from high to low price grocers. We analyze these changes by developing a GE model that features consumer search (Burdett and Judd, 1983) and entry and firms heterogeneity (Hopehayn, 1992). We show more productive firms post lower prices, have larger profits and revenue productivity. Under certain conditions, they have higher markups and lower labor share. Technological shifts not only lower the cost of posting prices thus creating a long tail in sales distribution and thus exacerbating the price dispersion, but they also lower the search frictions thus allowing more frequent purchases to be made at high productivity firms. This improvement in match “quality” thus translates into increased revenue productivity and declined labor share. Contrary to previous studies, the decline in labor share is indicative of better production allocation.