The Distribution of Food Retail Prices and the Euro Changeover: Signpost Items Versus Occasional Goods

Abstract

ABSTRACTThe Euro changeover distorted previously well‐formed nominal price patterns. Food retailers may have reacted by adjusting prices to reintroduce psychological prices as before the Euro changeover. We employ a detailed data set of German food retail prices before and after the Euro changeover to test three different benchmarks indicating potential adjustments of prices. However, none of these benchmarks do adequately reflect the actual distribution of prices. We find that prices of signpost items follow best a conversion at the official rate. Also, signpost items show a slower price adjustment. Occasional goods’ prices indicate a reestablishment of psychological price patterns, in particular for the ending digits; price distributions are adjusted faster. Further, price inflation is about zero for both goods, but prices in particular for signpost items have been significantly raised just before the Euro changeover. These different pricing patterns may be explained by consumer behavior. Consumers react more sensitive to price changes of frequently purchased goods (signpost items), and thus, retailers convert prices at the official rate and postpone price adjustments for these items after the Euro changeover. [JEL Classifications: D40, L66, Q13].