Holiday Price Rigidity and Cost of Price Adjustment

55 Pages Posted: 31 Jan 2009

See all articles by Daniel Levy

Daniel Levy

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

Georg Muller

Strategic Pricing Group

Haipeng (Allan) Chen

University of Kentucky - Gatton College of Business and Economics

Mark E. Bergen

University of Minnesota - Carlson School of Management

Shantanu Dutta

University of Southern California - Marshall School of Business

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Abstract

The Thanksgiving-Christmas holiday period is a major sales period for US retailers. Due to higher store traffic, tasks such as restocking shelves, handling customers' questions and inquiries, running cash registers, cleaning, and bagging, become more urgent during holidays. As a result, the holiday-period opportunity cost of price adjustment may increase dramatically for retail stores, which should lead to greater price rigidity during holidays. We test this prediction using weekly retail scanner price data from a major Midwestern supermarket chain. We find that indeed, prices are more rigid during holiday periods than non-holiday periods. For example, the econometric model we estimate suggests that the probability of a price change is lower during holiday periods, even after accounting for cost changes. Moreover, we find that the probability of a price change increases with the size of the cost change, during both, the holiday as well as non-holiday periods. We argue that these findings are best explained by higher price adjustment costs (menu cost) the retailers face during the holiday periods. Our data provides a natural experiment for studying variation in price rigidity because most aspects of market environment such as market structure, industry concentration, the nature of long-term relationships, contractual arrangements, etc., do not vary between holiday and non-holiday periods. We, therefore, are able to rule out these commonly used alternative explanations for the price rigidity, and conclude that the menu cost theory offers the best explanation for the holiday period price rigidity.

Suggested Citation

Levy, Daniel and Muller, Georg and Chen, Haipeng (Allan) and Bergen, Mark E. and Dutta, Shantanu, Holiday Price Rigidity and Cost of Price Adjustment. Economica, Forthcoming, Emory Law and Economics Research Paper No. 9-41, Available at SSRN: https://ssrn.com/abstract=1335688

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 )

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Rich Building
Atlanta, GA 30322-0001
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HOME PAGE: http://economics.emory.edu/home/people/faculty/Levydaniel.html

Rimini Center for Economic Analysis ( email )

Wilfrid Laurier University
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Waterloo, Ontario N2L3C5
Canada

HOME PAGE: http://rcea.org/

Georg Muller

Strategic Pricing Group ( email )

18W140 Butterfield Rd.
Oakbrook Terrace, IL 60181
United States

Haipeng (Allan) Chen

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States

Mark E. Bergen

University of Minnesota - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-1821 (Phone)

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)

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