The effects of general inflation and idiosyncratic cost shocks on within-commodity price dispersion: Evidence from microdata

This study investigates the dispersion of price levels within highly disagg regated markets by examining plant-level product records from the U. S. Cen sus of Manufactures. The paper estimates the effects of inflation on price dispersion through cross-sectional variation in the drift rate of average i nput costs within a market, arguing that, in several models that relate inf lation to price dispersion, the effects of cost increases on dispersion is similar to the effects of general inflation. We also disentangle the effect s of aggregate and idiosyncratic shocks on price dispersion. In general, we find that the higher the drift rate of input costs of a given commodity, t he larger the amount of price dispersion. The standard deviation of idiosyn cratic shocks also is positively correlated with the degree of price disper sion.