House Prices, Local Demand, and Retail Prices

NBER Working Paper No. 20710

Issued in November 2014, Revised in June 2016

NBER Program(s):Corporate Finance, Economic Fluctuations and Growth, Industrial Organization, Labor Studies, Monetary Economics



We use detailed micro data to document a causal response of local retail prices to changes in local house prices, with elasticities of 15%-20% across housing booms and busts. Notably, these price responses are largest in zip codes with many homeowners, and non-existent in zip codes with mostly renters. We provide evidence that these retail price responses are driven by changes in markups rather than by changes in local costs. We then argue that markups rise with house prices, particularly in high homeownership locations, because greater housing wealth reduces homeowners' demand elasticity, and firms raise markups in response. Consistent with this explanation, shopping data confirms that house price changes affect the price sensitivity of homeowners, but not that of renters. Our evidence suggests a new source of markup variation in business cycle models.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w20710

Published: Johannes Stroebel & Joseph Vavra, 2019. "House Prices, Local Demand, and Retail Prices," Journal of Political Economy, vol 127(3), pages 1391-1436.

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