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

42 Pages Posted: 13 Feb 2019 Last revised: 26 Aug 2020

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 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

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)

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

2110 Speedway B6000
Austin, TX 78705
United States

HOME PAGE: http://https://sites.utexas.edu/yannis-stamos/

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