How Much Are You Paying? Grocery Store Price Disparities and Potential Solutions at the University of Illinois Urbana-Champaign

Abstract

In the perfect competition economic model, all firms in a market sell their goods for the same price at which the average cost to produce the goods is minimized. Consumers would not buy from any firm selling above this price point as other firms would be selling at the lower price, and firms would not operate below this price as doing so would result in an economic loss. While this model is helpful, it relies on assumptions that simplify real-world conditions, one of which is the absence of transaction costs: consumers know the prices at all firms and can switch buying between firms at no cost. This paper examines how transaction costs create price disparities in grocery stores in the Urbana-Champaign area. The results find that local grocery stores set prices at statistically significantly higher levels than their non-local competitors, most likely due to consumer transaction costs. This study considers how this disparity could be remedied through local government intervention as a means to increase incentive in the market and how new policy can be implemented effectively.