The Effects of Menu Costs on Retail Performance: Evidence from Adoption of the Electronic Shelf Label Technology
34 Pages Posted: 25 Jul 2017 Last revised: 24 Jun 2018
Date Written: July 22, 2017
We use the adoption of electronic shelf labels (ESLs) by a major international grocery retailer in 2015 in the United Kingdom to identify the effects of reducing physical menu costs (i.e., operational costs of price adjustments) on retail performance. We find that the installation of ESLs improved performance: Gross margins and quantity sold increased, while the average price per-unit-sold decreased. These findings also suggest that two direct mechanisms through which consumers might be hurt from ESLs (i.e., more expensive products or fewer products sold, on average) were not supported by the data. Moreover, ESLs affected pricing decisions: Prices change more frequently, price adjustments are smaller, and batching of price changes across products declines. Finally, the impact of ESLs on pricing was asymmetric and heterogeneous: ESLs had a statistically significant effect on the frequency of downward but not upward price changes, and it had a statistically significant effect on the average price per-unit-sold of high-shelflife products but not of low-shelflife products.
Keywords: Menu Cost, Dynamic Pricing, Ordering, Revenue Management, Welfare Analysis
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