DP8856 When the Baby Cries at Night: Uninformed and Hurried Buyers in Non-Competitive Markets

Author(s): Giacomo Calzolari , Andrea Ichino , Francesco Manaresi , Viki Nellas

Publication Date: February 2012

Keyword(s): consumer's information , demand elasticity , pharmacies , price competition , regression discontinuity

JEL(s): D43 , D83 , L13

Programme Areas: Industrial Organization , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP8856.asp.asp

We study the entrance in a retail market of consumers who are less elastic because of hurriedness and lack of information. Theory predicts that firms react by increasing prices to expand surplus extraction, but this effect weakens as market competition increases. High frequency data from Italian pharmacies confirm these predictions. Monthly variation in the number of newborns at the city level generates exogenous changes in the number of less elastic buyers (the parents) who consume a basket of hygiene products demanded by more experienced and elastic consumers as well. We estimate that the number of newborns has a positive effect on the equilibrium price even if marginal costs are decreasing. We exploit exogenous variation in market competition generated by the Italian legislation concerning how many pharmacies should operate in a city as a function of the existing population. Using a Regression Discontinuity design we find that an increase in competition has a significant and negative effect on the capacity of sellers to extract surplus from less elastic buyers.