Price Dispersion In U.S. Manufacturing: Implications For The Aggregation Of Products And Firms

This paper addresses the question of whether products in the U.S. Manufacturing sector sell at a single (common) price, or whether prices vary across producers. Price dispersion is interesting for at least two reasons. First, if output prices vary across producers, standard methods of using industry price deflators lead to errors in measuring real output at the industry, firm, and establishment level which may bias estimates of the production function and productivity growth. Second, price dispersion suggests product heterogeneity which, if consumers do not have identical preferences, could lead to market segmentation and price in excess of marginal cost, thus making the current (competitive) characterization of the Manufacturing sector inappropriate and invalidating many empirical studies. In the course of examining these issues, the paper develops a robust measure of price dispersion as well as new quantitative methods for testing whether observed price differences are the result of differences in product quality. Our results indicate that price dispersion is widespread throughout manufacturing and that for at least one industry, Hydraulic Cement, it is not the result of differences in product quality.