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http://ssrn.com/abstract=437401
 
 

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Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets


Mark Zbaracki


University of Western Ontario - General Management Area Group

Mark Ritson


London Business School

Daniel Levy


Bar-Ilan University - Department of Economics; Emory University - Department of Economics; Rimini Center for Economic Analysis

Shantanu Dutta


University of Southern California - Marshall School of Business

Mark E. Bergen


University of Minnesota - Carlson School of Management


Review of Economics and Statistics, Vol. 86, No. 2, pp. 514-533, May 2004

Abstract:     
We study the price adjustment practices and provide quantitative measurement of the managerial and customer costs of price adjustment using data from a large U.S. industrial manufacturer and its customers. We find that price adjustment costs are a much more complex construct than the existing industrial organization or the macroeconomics literature recognizes. In addition to physical costs ('menu costs'), we identify and measure three types of managerial costs - information gathering, decision-making and communication costs, and two types of customer costs - communication, and negotiation costs. We find that the managerial costs are more than six times, and customer costs are more than twenty times, the menu costs. In total, the price adjustment costs comprise 1.22% of the company's revenue and 20.03% of the company's net margin. We show that many components of the managerial and customer costs are convex, while the menu costs are not. We also document the link between price adjustment costs and price rigidity. Finally, we provide evidence of managers' fear of 'antagonizing' customers.

Keywords: Price rigidity, cost of price adjustment, managerial cost, customer cost, menu cost, information gathering cost, decision making cost, communication cost, negotiation cost, convex cost of adjustment

JEL Classification: E12, E31, L16, F31, F41

Accepted Paper Series


Not Available For Download

Date posted: October 23, 2003  

Suggested Citation

Zbaracki, Mark and Ritson, Mark and Levy, Daniel and Dutta, Shantanu and Bergen, Mark E., Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets. Review of Economics and Statistics, Vol. 86, No. 2, pp. 514-533, May 2004. Available at SSRN: http://ssrn.com/abstract=437401

Contact Information

Mark Zbaracki
University of Western Ontario - General Management Area Group ( email )
London, Ontario
Canada
Mark Ritson
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
Daniel Levy (Contact Author)
Bar-Ilan University - Department of Economics ( email )
Ramat-Gan, 5290002
Israel
+972 3 531-8345 (Phone)
+972 3 738-4034 (Fax)
HOME PAGE: http://econ.biu.ac.il/en/levy

Emory University - Department of Economics ( email )
1602 Fishburne Drive, Suite 306
Rich Building
Atlanta, GA 30322-0001
United States
HOME PAGE: http://economics.emory.edu/home/people/faculty/Levydaniel.html
Rimini Center for Economic Analysis ( email )
Via Patara, 3
Rimini (RN), RN 47900
Italy
HOME PAGE: http://www.rcfea.org/
Shantanu Dutta
University of Southern California - Marshall School of Business ( email )
Hoffman Hall 701
Los Angeles, CA 90089-1427
United States
213-740-5038 (Phone)
213-740-7828 (Fax)
Mark E. Bergen
University of Minnesota - Carlson School of Management ( email )
19th Avenue South
Minneapolis, MN 55455
United States
612-624-1821 (Phone)
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