Holiday Price Rigidity and Cost of Price Adjustment

55 Pages Posted: 8 Sep 2006 Last revised: 30 May 2012

Daniel Levy

Bar-Ilan University - Department of Economics; Emory University - Department of Economics; Rimini Center for Economic Analysis

Georg Müller

Litholink Corporation

Haipeng (Allan) Chen

Texas A&M University

Mark E. Bergen

University of Minnesota - Carlson School of Management

Shantanu Dutta

University of Southern California - Marshall School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: May 6, 2008

Abstract

The Thanksgiving-Christmas holiday period is a major sales period for US retailers. Due to higher store traffic, tasks such as restocking shelves, handling customers' questions and inquiries, running cash registers, cleaning, and bagging, become more urgent during holidays. As a result, the holiday-period opportunity cost of price adjustment may increase dramatically for retail stores, which should lead to greater price rigidity during holidays. We test this prediction using weekly retail scanner price data from a major Midwestern supermarket chain. We find that indeed, prices are more rigid during holiday periods than non-holiday periods. For example, the econometric model we estimate suggests that the probability of a price change is lower during holiday periods, even after accounting for cost changes. Moreover, we find that the probability of a price change increases with the size of the cost change, during both, the holiday as well as non-holiday periods. We argue that these findings are best explained by higher price adjustment costs (menu cost) the retailers face during the holiday periods. Our data provides a natural experiment for studying variation in price rigidity because most aspects of market environment such as market structure, industry concentration, the nature of long-term relationships, contractual arrangements, etc., do not vary between holiday and non-holiday periods. We, therefore, are able to rule out these commonly used alternative explanations for the price rigidity, and conclude that the menu cost theory offers the best explanation for the holiday period price rigidity.

Keywords: price rigidity, price stickiness, cost of adjustment, menu cost, holiday period, sticky price, rigid price, asymmetric price adjustment, monetary policy

JEL Classification: E12, E31, L11, L16, L20, M20, M30, M31

Suggested Citation

Levy, Daniel and Müller, Georg and Chen, Haipeng (Allan) and Bergen, Mark E. and Dutta, Shantanu, Holiday Price Rigidity and Cost of Price Adjustment (May 6, 2008). Emory Law and Economics Research Paper No. 06-13; Bar Ilan Univ. Pub Law Working Paper No. 06-1. Available at SSRN: https://ssrn.com/abstract=389640 or http://dx.doi.org/10.2139/ssrn.389640

Daniel Levy (Contact Author)

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 5290002
Israel
+972 3 531-8345 (Phone)
+972 3 738-4034 (Fax)

HOME PAGE: http://econ.biu.ac.il/en/levy

Emory University - Department of Economics ( email )

1602 Fishburne Drive, Suite 306
Rich Building
Atlanta, GA 30322-0001
United States

HOME PAGE: http://economics.emory.edu/home/people/faculty/Levydaniel.html

Rimini Center for Economic Analysis ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

HOME PAGE: http://www.rcfea.org/

Georg Sebastian Müller

Litholink Corporation ( email )

2250 West Campbell Park Drive
Chicago, IL 60612
United States
312-243-0600 (Phone)

Haipeng (Allan) Chen

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4218
United States

HOME PAGE: http://mays.tamu.edu/directory/individual.php?eid=631

Mark E. Bergen

University of Minnesota - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-1821 (Phone)

Shantanu Dutta

University of Southern California - Marshall School of Business ( email )

Hoffman Hall 701
Los Angeles, CA 90089-1427
United States
213-740-5038 (Phone)
213-740-7828 (Fax)

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