Price adjustment at multiproduct retailers

Abstract

We empirically study the price adjustment process at multiproduct retail stores. We use a unique store level data set for five large supermarket and one drugstore chains in the U.S., to document the exact process required to change prices. Our data set allows us to study this process in great detail, describing the exact procedure, stages, and steps undertaken during the price change process. We also discuss various aspects of the microeconomic environment in which the price adjustment decisions are made, factors affecting the price adjustment decisions, and firm-level implications of price adjustment decisions. Specifically, we examine the effects of the complexity of the price change process on the stores' pricing strategy. We also study how the steps involved in the price change process, combined with the laws governing the retail price setting and adjustment, along with the competitive market structure of the retail grocery industry, influence the frequency of price changes. We also examine how the mistakes that occur in the price change process influence the actions taken by these multiproduct retailers. In particular, we study how these mistakes can make the stores vulnerable to civil law suits and penalties, and also damage their reputation. We also show how the mistakes can lead to stockouts or unwanted inventory accumulations. Finally, we discuss how retail stores try to minimize these negative effects of the price change mistakes. 3 "It is unfortunate that so little attention has been given to characterizing the circumstances that give rise to high and low levels of nominal price inertia. Progress in this dimension calls for more detailed empirical work and for increased understanding of the manner in which corporations actually arrive at pricing decisions." Andrew Caplin "Perhaps in no area of economic inquiry is there so wide a gap between theoretical and empirical work as in the field which has long been considered the core of economic analysis-the formation of prices." NBER Committee on Price Determination

List pricing versus dynamic pricing: Impact on the revenue risk

“…Levy et al (1997Levy et al ( , 1998; Bergen et al (2003) and Zbaracki et al (2004) explore List Pricing versus Dynamic Pricing: Impact on the Revenue Risk 4 the cost of price changes in different industries. Levy et al (1997) analyze the data of pricing systems of supermarket chains, derived from five different costs of price changes.…”

“…Levy et al (1998) extend this analysis by describing the price adjustment process and involved decisions in more detail. Bergen et al (2003) emphasize that implementing price changes is not costless and offer recommendations for a price change strategy at the managerial level.…”

“…However, changing the price can often involve significant costs and is not always feasible, as shown in Levy et al (1998); Bergen et al (2003) and Netessine (2006). Different types of costs accompanying price changes and overall costs can amount to one-fifth of a company's net margin, as the empirical investigation by Zbaracki et al (2004) reveals.…”

Price rigidity and flexibility: new empirical evidence

“…The data, which are used also by Mu¨ller and Ray (2007), come from the scanner data set of Dominick's, a large US supermarket chain in the Chicago metropolitan area, operating 94 stores with a market share of about 25%. According to Levy et al (1997Levy et al ( , 1998 and Dutta et al (1999Dutta et al ( , 2002, the sales of large multi-store US supermarket chains of this type comprised 86.3% of the total US retail grocery sales. Thus, the market they are studying has a quantitative economic significance, as well.…”

Beyond the Cost of Price Adjustment: Investments in Pricing Capital

“…See, for example, Andersen (1994), Ball and Mankiw (1994), Caplin and Spulber, 1987, Caplin and Leahy (1991, Danziger (1988), Mankiw (1985, Mankiw and Romer (1991), Rotemberg (1982Rotemberg ( , 1987, and Sheshinski and Weiss (1977), to mention just a few. These price adjustment costs can be a source of price rigidity as demonstrated theoretically by Mankiw (1985), Blanchard and Kiyotaki (1987), and Ball and Romer (1990), and empirically by Levy et al (1997Levy et al ( , 1998 and Dutta et al (1999). Indeed, according to Blinder et al (1998, p. 21), these costs have become "…one of the main strands of New Keynesian theorizing" as many predictions of the traditional Keynesian and more recent New Keynesian models crucially depend on the existence of some form of price rigidity.…”