Store expensiveness and consumer saving: Insights from a new decomposition of price dispersion

Abstract

We build on recent work that analyzes consumers’ ability to save by exploiting price dispersion in grocery stores. We show that store expensiveness varies across consumers depending on the basket they consume, meaning that consumers can save more by shopping at a store that is cheaper for their basket rather than at a store that is cheaper overall. We incorporate this insight into a new price variance decomposition that is a refinement of existing approaches. Our results show that the ability to buy products from the store where they are cheapest is much less important than previous work had found; rather, the ability to choose the cheapest stores for one’s basket is a more important source of variation in the prices consumers pay. Our approach also provides an informal test for competing theories modeling consumers as either shopping for products or shopping for categories, and finds support for both. We conclude that the idea of consumers choosing the right store for their basket has substantial traction and is a useful addition to our arsenal of models of consumer search behavior.