Retail Prices in a City

Abstract

This study examines grocery price differentials across neighbor hoods in a large metropolitan area (the city of Jerusalem, Israel). Important variation in access to affordable grocery shopping is documented using CPI data on prices and neighborhood-level credit card expenditure data. Residents of peripheral, nonaffluent neighborhoods are charged some of the highest prices in the city and yet display a low tendency to shop outside their neighborhood. In contrast, residents of affluent, centrally located neighborhoods often benefit from lower grocery prices charged in their own neighborhood while also displaying a high propensity to shop at the hard discount grocers located in the city’s commercial districts. The role of spatial frictions in shaping these patterns is studied within a structural model where households determine their shopping destination and retailers choose prices. The estimated model implies strong spatial segmentation in households’ demand. Counterfactual analyses reveal that alleviating spatial frictions results in considerable benefits to the average resident of the peripheral neighborhoods. At the same time, it barely affects the equilibrium prices charged across the city, and so it does little to benefit households with limited mobility (e.g., the elderly). (JEL L11, L81, R22, R23)