Menu Costs and the Bullwhip Effect: Supply Chain Implications of Dynamic Pricing

22 Pages Posted: 13 Feb 2019

Date Written: February 3, 2019

Abstract

We study the supply chain implications of dynamic pricing. Specifically, we estimate how reducing menu costs — the operational burden of adjusting prices — would affect supply chain stability. We theorize that reducing menu costs would reduce the bullwhip effect by mitigating Lee et al.’s (1997) first bullwhip driver, demand signal processing. We test this prediction by fitting a structural econometric inventory model to data from a large Chinese supermarket. We estimate that removing menu costs would stabilize the supply chain, but not by mitigating Lee et al.’s first bullwhip driver as we had predicted, but by mitigating Lee et al.’s third bullwhip driver, order batching. Specifically, we estimate that removing menu costs would cut the average batch size by 5.0%, which would decrease the average standard deviation of orders by 3.9%.

Keywords: dynamic pricing, menu costs, supply chain, bullwhip effect, empirical operations management, structural estimation

JEL Classification: L11, L23

Suggested Citation

Bray, Robert and Stamatopoulos, Ioannis, Menu Costs and the Bullwhip Effect: Supply Chain Implications of Dynamic Pricing (February 3, 2019). Available at SSRN: https://ssrn.com/abstract=3328192 or http://dx.doi.org/10.2139/ssrn.3328192

Robert Bray

Northwestern University - Department of Managerial Economics and Decision Sciences (MEDS) ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Ioannis Stamatopoulos (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

2110 Speedway B6000
Austin, TX 78705
United States

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