When Little Things Mean a Lot: On the Inefficiency of Item Pricing Laws

Abstract

Item pricing laws (IPLs) require a price tag on every item sold by a retailer. We study IPLs and assess their efficiency by examining and quantifying their costs and comparing them to their measurable benefits. On the cost side, we posit that IPLs should lead to higher prices because they increase the cost of pricing as well as the cost of price adjustment. We test this prediction using data collected from large supermarket chains in the Tri-State area of New York, New Jersey and Connecticut, which offer a unique setting because these states vary in their use of IPLs, but otherwise offer geographical proximity with each other and similar markets, supermarket chains, and socioeconomic environments. We find that IPL store prices are higher by about 20¢-25¢ or 8.0%-9.6% per item on average, in comparison to non-IPL stores. As a control, we use data from stores that are exempted from IPL requirements (because they use electronic shelf labels), and find that their prices fall between IPL and non-IPL store prices. To assess the efficiency of IPLs, we compare these costs to existing measures of the benefits of IPLs. Specifically, we study the frequency and magnitude of pricing errors, which the IPLs are supposed to prevent. We find that the IPLs' costs are an order of magnitude higher than these benefits.