In this paper, we examine firms’ ability to anticipate and adapt to changes in consumer demand, an effort that requires substantial resource allocation, often in advance. We study the effect of a nationwide labeling policy that mandates front-of-package labels on unhealthy food products. We find that, on average, sales of products with one or more warning labels reduce by 16% compared to non-labeled products, with large heterogeneity across categories and among different consumer segments. Firms strategically adjust their product designs just-below the labeling threshold. Firms are also able to accurately predict the right products for reformulation based on heterogeneity in consumer response. The effects are primarily driven by larger, more successful firms, who are better able to foresee and adapt to shifting demand. We also provide evidence that firms’ ability to adapt directly translates to an increase in sales.

How do firms and consumers respond, when consumers realize that they pay more than other consumers for the same product? We study the effects of a regulation that required Israeli retailers to display on-the-shelf signs showing the (cheap) international price of products alongside the price of the very same products in the local store. We find that prices fell on average by 8%, and more so for products whose prices were more expensive compared to their international counterparts. Quantities increased after prices fell, but were significantly smaller than increases predicted based on pre-regulation demand elasticities and actual price drops. Moreover, the products that remained more expensive relative to their international counterparts exhibited larger differences between predicted and actual quantities. To explain these findings, we develop and estimate a model that incorporates the role of salient unfair prices. We find that from a consumer point of view, a 1% decrease in a product’s sale price is equivalent to a 20 percentage points increase in the international price of that product. Also, consumer welfare decreased for some products. This happens when the disutility from observing that other consumers paid less exceeds the added utility from increased consumption. We discuss implications of our findings for optimal pricing strategies and theoretical models of salient thinking.

Expenditure on food represents a considerable share of household spending, and policy-makers are considering various means to reduce food prices. In this paper we investigate the effects of information-enhancing initiative in the Israeli retail food market. The initiative involved a monthly comparison of the price of a fixed basket of 68 popular goods sold by Israeli supermarket chains. Using detailed price information and a difference-in-differences research design, we find a drop of 4% in the basket price. The drop in prices is concentrated among publicly-traded retailers, and it rises after media reports on the results of the basket comparison. Overall, our findings suggest that drawing attention to prices could be an effective means by policy makers to foster competition and reduce prices.