Prices and Supply Disruptions during Natural Disasters [report]

Alberto Cavallo, Eduardo Cavallo, Roberto Rigobon
2013 unpublished
We study the daily behavior of supermarket prices and product availability following two recent natural disasters: the 2010 earthquake in Chile and the 2011 earthquake in Japan. In both cases there was an immediate and persistent effect on product availability. The number of goods available for sale fell 32 percent in Chile and 17 percent in Japan from the day of the disaster to its lowest point, which occurred 61 and 18 days after the earthquakes, respectively. Product availability recovered
more » ... owly, and a significant share of goods remained out of stock after six months. By contrast, prices were relatively stable and did not increase for months after the earthquakes, even for goods that were experiencing severe stockouts. These trends are present at all levels of aggregation, but appear strongly in nonperishable goods and emergency products. Our findings shed light into the determinants of sticky prices in conditions where traditional adjustment costs are less important. In particular, we look at the frequency and magnitudes of price changes in both countries and find that the results in Chile are consistent with pricing models where retailers have fear of "customer anger". In Japan, by contrast, the evidence suggests a bigger role for supply disruptions that restricted the ability of retailers to re-stock goods after the earthquake. 1 This has limited the literature's understanding of how prices and quantities react to this type of exogenous, unanticipated shock, which is a basic and fundamental issue in economics. In this paper we propose using online data to measure two key economic variables in the aftermath of a natural disaster: supply disruptions and pricing behaviors. We use data from the Billion Prices Project (BPP) at MIT, a large and continuing effort to collect online information from large retailers around the world on a daily basis. We construct daily price indices across various goods and categories and measure the degree of supply disruption with an index of product availability, which tracks the number of goods that are available for purchase over time. We focus on the earthquakes in Chile (2010) and Japan (2011) , two major catastrophic natural disasters that occurred in countries where the BPP was collecting data before the events. We also limit our analysis to products sold in supermarkets, such as food, beverages, and other basic necessities which are more likely to experience demand changes after a natural disaster and for which we have more comprehensive data coverage. We show that these natural disasters had an immediate impact on product availability. A large share of goods went out of stock within days. The fall was gradual but larger in Chile, where the number of products available fell by 32 percent in the first two months after the earthquake, recovering slowly after that. In Japan, the fall was faster but smaller, with product availability dropping by 17 percent within 18 days after the earthquake, and recovering gradually after that. Prices, by contrast, remained surprisingly stable for several months after the earthquakes. The inflation rate started to rise only after 4 months in Japan, and 6 months in Chile. Nearly all categories of goods experienced a drop in product availability in both countries during the first months. The recovery and price-change behaviors differed significantly across categories. Many goods that could be considered indispensable after an earthquake, such as powdered milk, diapers, and baby food, disappeared quickly from the stores and maintained stable prices for a long time. Others, such as batteries, had drops in availability but recovered quicker with rising prices. Natural disasters, with their unanticipated and exogenous nature, can be used to test some of the predictions of the large New Keynesian literature on price stickiness. We therefore focus on variables such as the frequency of price changes, their average size, and the shape of the hazard functions for both stockout events and price adjustments. In Chile, the data is consistent with the predictions of a growing strand of the literature that has emphasized how fear of "consumer anger" may affect firms' pricing decisions. 1 In particular, the frequency of price changes falls dramatically for several months after the earthquake, suggesting that firms were delaying their price adjustments. By contrast, in Japan the evidence is more consistent with a supply shock that affected the retailer's ability to re-stock. Product availability also fell dramatically, but the number of price changes remained stable over time. In addition, the 1
doi:10.3386/w19474 fatcat:m6w7y7f5zjhateww7vdzaz7u2y