Best Prices: Price Discrimination and Consumer Substitution

This paper proposes a method for aggregating prices when retailers use periodic sales to price-discriminate amongst heterogeneous customers. In the motivating model, loyal customers buy one brand and do not strategically time purchases, while Bargain Hunters always pay the lowest price available, the "best price." In the model, the best price is part of an exact price index. Accounting for the best price also substantially improves the empirical match between conventional price aggregation strategies and actual prices paid by consumers. The methodology improves inflation measurement while imposing little burden on the data-collection agency.