Inventory Record Inaccuracy Explains Price Rigidity in Perishable Groceries

41 Pages Posted: 2 Apr 2021 Last revised: 2 Aug 2022

See all articles by Naveed Chehrazi

Naveed Chehrazi

University of Texas at Austin - Red McCombs School of Business; University of Texas at Austin - Red McCombs School of Business

Robert Evan Sanders

University of California, San Diego (UCSD) - Rady School of Management

Ioannis Stamatopoulos

The University of Texas at Austin - McCombs School of Business

Date Written: March 19, 2021

Abstract

Grocery retailers cannot engage in inventory-based pricing without physically auditing their shelves because their inventory records are inaccurate and incomplete. We argue that this informational friction, known in the literature as inventory record inaccuracy (IRI), is much more powerful in explaining price rigidity in perishable groceries than physical menu costs are. We build our argument in two steps. First, we add inventory shrink, deteriorating product quality, incomplete information about expiration dates, and menu costs to Gallego and Van Ryzin’s (1994) classic revenue management model, and we derive the model's optimal pricing policy when the price setter can and cannot condition on real-time inventory information. Within the model, reducing a representative product's physical menu cost by 90% increases its price-updating frequency without IRI by at least 300% more than it does with IRI. Second, we provide proof of concept for our theory with data from two industry pilots: a U.K. grocery store that installed electronic shelf labels (ESLs)—a technology that reduces physical menu costs—and an E.U. grocery store that installed both ESLs and expanded barcodes—the latter being a technology that reduces IRI. Consistent with our theory, the technology upgrade increased price-updating frequency by 54% in the first pilot and by 853% in the second pilot.

Suggested Citation

Chehrazi, Naveed and Chehrazi, Naveed and Sanders, Robert Evan and Stamatopoulos, Ioannis, Inventory Record Inaccuracy Explains Price Rigidity in Perishable Groceries (March 19, 2021). Available at SSRN: https://ssrn.com/abstract=3808358 or http://dx.doi.org/10.2139/ssrn.3808358

Naveed Chehrazi

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

Austin, TX 78712
United States

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

Austin, TX 78712
United States

Robert Evan Sanders

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
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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