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 differences in differences research design, we show that both price levels and price dispersion declined after the regulation was instituted. 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. Consistent with their model, we show that after prices became transparent low priced chains used extensively price advertising, referencing to price comparison surveys conducted by the media to induce credibility. Our findings highlight the importance of the media in facilitating credible informative advertising and the pro competitive role of advertising.