Abstract:
We study the effects of a regulation requiring supermarket chains in Israel to post prices online. Using price data collected before and after the regulation went into effect and a difference-in-differences research design, we show that both price levels and price dispersion declined after the regulation became effective. These patterns were driven primarily by price reductions in high-priced chains. Chains also nearly eliminated within-chain price dispersion, by setting identical prices in all stores. We use the framework by Robert and Stahl (1993) to interpret our findings, showing that low-priced chains extensively used price advertising after prices became transparent. These chains referenced to price-comparison surveys conducted by the media to induce credibility for the ads. Our findings highlight the importance of price transparency and the pro-competitive role of price advertising.