The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains
Bar-Ilan University - Department of Economics; Emory University - Department of Economics; Rimini Center for Economic Analysis
Mark E. Bergen
University of Minnesota - Carlson School of Management
University of Southern California - Marshall School of Business
Robert W. Baird & Co. Incorporated
Quarterly Journal of Economics, Vol. 112, No. 3, pp. 791-825, August 1997
We use store-level data to document the exact process of changing prices and to directly measure menu costs at five multistore supermarket chains. We show that changing prices in these establishments is a complex process, requiring dozens of steps and a nontrivial amount of resources. The menu costs average $105,887/year per store, comprising 0.70 percent of revenues, 35.2 percent of net margins, and $0.52/price change. These menu costs may be forming a barrier to price changes. Specifically, (1) a supermarket chain facing higher menu costs (due to item pricing laws that require a separate price tag on each item) changes prices two and one-half times less frequently than the other four chains; (2) within this chain the prices of products exempt from the law are changed over three times more frequently than the products subject to the law.
Keywords: Menu Cost, Price Rigidity, Cost of Price Adjustment, Time-Dependent Pricing Rules, Item Pricing Law, Retail Supermarket Chain
JEL Classification: E12, E31, L16
Date posted: February 27, 2005
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