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

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 volatility. Fitting a structural econometric model to data from a large Chinese supermarket chain, we estimate that removing menu costs would: (i) reduce the mean shipment coefficient of variation by 7.2 percentage points (pp), (ii) reduce the mean sales coefficient of variation by 4.3 pp, and (iii) reduce the mean bullwhip effect by 2.9 pp. These stabilizing changes are almost entirely mediated by an increase in the mean sales rate.

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

JEL Classification: L11, L23