Rubin on "Item Pricing Laws" in the WSJ

Josh Wright —  10 March 2007

Paul Rubin (Emory Law) has an excellent piece in the WSJ taking state regulators to task for “Item Pricing Laws” which require that most goods in retail stores have an individual price sticker rather than, for example, a price tag on the store shelf. IPLs increase “menu costs” when retailers want to change prices which chills sales and are likely to increase prices. Luckily, one doesnt have to wait for the evidence because Professor Rubin and his co-authors have it. Here is a description of their study:

In order to estimate the effect of the laws on actual prices, an area where one could compare similar stores subject to different laws is best — and the tri-state region of suburban New York, New Jersey and Connecticut is ideal. This region has similar socioeconomic characteristics, and markets are comparable in many respects. New York is an IPL state and New Jersey is not. In Connecticut, stores must either have item prices or use electronic shelf labeling systems, so that there are some stores subject to IPLs and some stores that are not.

The results? As expected, the IPL’s increase prices:

Prices in IPL stores are 20 cents to 25 cents higher per item than in non-IPL stores. Stores in Connecticut with electronic shelf labels were in the middle, with prices 15 cents lower than in IPL stores, and 10 cents higher than in non-IPL stores — because electronic shelf labels are more expensive than old fashioned labels but cheaper than item pricing. All results are highly statistically significant. The maximum estimate of the benefit of avoiding overcharges to consumers through IPLs is less that one cent per item. The costs exceed 20 cents per item. The laws are a bad deal for consumers.

How significant are these price differences — about a quarter per item? The average price of the items in our sample was about $2.50, so there is a 10% difference. This implies that prices of groceries are almost 10% higher in IPL stores. Food represents about 14% of the average family’s budget. IPLs, therefore, reduce the real incomes of families by more than 1% — a nontrivial amount.

As mentioned in the WSJ op-ed, the study is co-authored with Mark Bergen, Daniel Levy, Sourav Ray, and Benjamin Zeliger and is forthcoming in the JLE.  As earlier draft of the paper is available on SSRN here.

8 responses to Rubin on "Item Pricing Laws" in the WSJ

  1. 

    I found this WSJ editorial and the article to be of interest. But…when you think of it, 25 cents per item seems high. Price tags undoubtedly add cost, but I’m dubious if you can attribute the entire 25 cents to IPLs.

    If you have an interest, please check out my blog on Rubin et al’s article: http://www.pricingforprofit.com/blog/blog-view.php/blogid/82

  2. 

    Though I should note that I’ve just skimmed the paper once and glanced at the tables.

  3. 

    As I read it, they did not use distance to city as a control variable in the study in the conventional sense but chose suburbs for their comparisons that were equidistant from NYC to control for at least some of these differences. Obviously, some differences will still remain. But again, the in-state comparisons should alleviate concerns that the price effects they are picking up in the tri-state analysis are spurious.

  4. 
    Keith Sharfman 11 March 2007 at 12:25 pm

    Very interesting. Distance to the city is a creative variable to use. But it probably does not fully capture local differences in real estate prices and consumer demand. Newark is closer to NYC than is Scarsdale–and yet prices in Scarsdale are obviously going to be much higher, given its higher real estate prices and the relative affluence of its consumers.

  5. 

    Keith, one way the study attempts to control for these differences is by using upscale suburban areas in each of the three states that are equidistant from the city. Of course, this might not be sufficient if their are systematic differences in rents or labor costs across states — as you suggest. The appendix and tables have a list of the stores and cities if you want to take a look.

    But Rubin et al also have a nice WITHIN state test in Connecticut where having an electronic shelf label exempts the store from the IPL which allows price comparisons across chains within a state, across product categories. They get similar results with this test.

  6. 
    Keith Sharfman 11 March 2007 at 9:11 am

    Interesting. Does Rubin control for other variables that may be affecting prices, such as real estate values? New York has always had higher prices than NJ. The was true long before there was an IPL in NY. NY’s higher property rental rates–a cost that NY retailers pass along to their consumers–probably account for much of the difference.

    To see whether IPLs cause price increases, one would have to compare prices in NY before and after the law was passed (controlling for inflation and other variables). A yardstick comparison with NJ also may be feasible, but more variables would have to be controlled for.

  7. 

    Two words: Telepanel Systems.

    Demand creates its own supply.

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