Multi-establishment Firms, Pricing and the Propagation of Local Shocks : Evidence from US Retail

I study whether and how retail chains and their geographic distribution of stores contribute to the propagation of shocks across regions in the United States. Linking detailed store scanner micro-data to a county-level house price dataset for the period of the Great Recession, I investigate the spread of house-price-induced local shocks through the networks of retail chains. My main empirical finding is that county-level prices are sensitive to shocks in distant counties that happen to be served by the same retail chains. A 10% drop in house prices in other counties that are served by the same retailers leads, on average, to a 1.4% decline in the local consumer retail price index. My results hold after conditioning on trade relationships due to geographic proximity. In fact, I document that once the retail chains' networks are controlled for, there is no additional role for propagation of shocks across nearby regions. Finally, while the network of retail chains is an important determinant of the effect local shocks have on consumer prices, it does not affect wages in distant regions, which suggests that the network of retail chains affects consumers' real income. I rationalize the reduced-form estimates in a model in which retail chains vary prices uniformly across their stores as a function of changes in market demand that they face at the (aggregate) chain level. I find that the calibrated model with uniform pricing can fully account for the reduced-form effects. Counterfactual analysis shows that uniform pricing and the geographic distribution of retail chains reduced cross-county dispersion in inflation by 40% during the Great Recession, benefiting consumers from low-income counties that were less exposed to drops in local house prices