Best Prices: Price Discrimination and Consumer Substitution

NBER Working Paper No. 20768

Issued in December 2014, Revised in January 2018

NBER Program(s):Industrial Organization, Monetary Economics, Productivity, Innovation, and Entrepreneurship



We propose a method for aggregating prices when retailers use periodic sales to price-discriminate amongst heterogeneous customers. To do so, we introduce a model in which Loyal customers buy one brand and do not strategically time purchases, while Bargain Hunters always pay the lowest price available, the “best price”. We derive the exact price index and demonstrate empirically that accounting for our best price construct substantially improves the match between conventional price aggregation strategies and actual prices paid by consumers. We demonstrate that our methodology improves inflation measurement without imposing an unrealistically large burden on the data-collection agency.

Acknowledgments and Disclosures

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Document Object Identifier (DOI): 10.3386/w20768

Published: Judith A. Chevalier & Anil K Kashyap, 2019. "Best Prices: Price Discrimination and Consumer Substitution," American Economic Journal: Economic Policy, vol 11(1), pages 126-159.

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