Retail price concentration, transaction costs, and price flexibility circa 1900

Eckard, E. Woodrow
Explorations in Economic History Vol. 44 Issue 1, p. 131-153

This paper studies a unique 1901 data set containing prices of three products obtained from grocery stores in over 1400 cities nationwide. A striking characteristic is a high concentration of retail prices at relatively few “even” numbers. I propose a novel transactions cost explanation for this phenomenon on which existing theory is silent. In particular, grocers selected prices that simplified the task of toting up customer bills by hand and reduced related costs. As stores independently adopted this strategy across the country, prices converged to a few even numbers. Several empirical regularities for all three products are consistent with this explanation. An important implication is that preferences for computationally convenient prices would have made prices “sticky.” An independent study of price flexibility circa 1890 supports this hypothesis. The underlying data show price concentration patterns similar to the 1901 data, suggesting that the phenomenon covered a wide range of products.