Julia Passabom Araujo
Doctorate – Price Setting in Brazil from 1989 to 2007
Advisor: Prof. Dr. Mauro Rodrigues Junior
Comission: Profs. Drs. Marco Antônio Cesar Bonomo, Bernardo de Vasconcellos Guimarães and Márcio Issao Nakane
Class: 217, FEA-5
This doctoral dissertation documents price-setting behavior in Brazil using a unique dataset of store-level price quotes collected by the Fundação Instituto de Pesquisas Econômicas (FIPE) to construct the Consumer Price Index (CPI-FIPE) from 1989 to 2007. The dataset is extensive in terms of time (222 months), inflation variability (from hyperinflation to monthly deflation), and basket of goods and services (almost 11 million price quotes on 8,294 brands). The first chapter documents new evidence on the frequency and absolute size of price changes during the sample period. I find evidence of marked differences between hyperinflation (1989–1993) and low inflation (1995–2007) periods. During hyperinflation, the frequency and magnitude of price movements are remarkably higher. Once Plano Real took place, both statistics immediately shifted to a much lower and stable level, as did inflation. Price increases are more frequent during hyperinflation, although a small share of prices (mostly food items) drops every month. During low inflation, price decreases are almost as likely as price increases. I also document heterogeneities across different classifications of products. The second chapter investigates the relationship between inflation and relative price variability (RPV). The intramarket RPV significantly increases with the rate of inflation, but I find marked differences between the two inflationary scenarios. During hyperinflation, the relationship is roughly 70% of the magnitude of the relationship during low inflation. Higher levels of inflation are associated with higher degrees of inflation variability, yet the link is somewhat looser during the hyperinflation period. The impact of deflation (in absolute terms) is smaller than the impact of positive inflation during hyperinflation, yet stronger during low inflation. Finally, the third chapter documents the importance of Plano Real on consumers’ search costs. I estimate a nonsequential search model for homogeneous goods to structurally retrieve search costs using price data on 15 different brands of goods and services. The empirical strategy consists of using the Plano Real as a structural breakpoint in the data. I estimate the model splitting the data into before (January 1993 to June 1994) and after (August 1994 to December 1995) the plan, and I find evidence on first-order stochastic dominance of the search cost distribution of the former into the latter; that is, search costs are higher during hyperinflation. I also document evidence of the effect of the plan on shrinking price-cost margins. When searching is less costly, stores lose market power.
*Abstract provided by the author