Asymmetric Wholesale Pricing: Theory and Evidence

Bar-Ilan University Economics Working Paper No. 2-05

Emory University Economics Working Paper No. 05-13

103 Pages Posted: 28 Mar 2005

See all articles by Sourav Ray

Sourav Ray

McMaster University - DeGroote School of Business

Haipeng (Allan) Chen

University of Kentucky - Gatton College of Business and Economics

Mark E. Bergen

University of Minnesota - Carlson School of Management

Daniel Levy

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

Multiple version iconThere are 2 versions of this paper

Date Written: January 2005

Abstract

Asymmetric pricing is the phenomenon where prices rise more readily than they fall. We articulate, and provide empirical support for, a theory of asymmetric pricing in wholesale prices. In particular, we show how wholesale prices may be asymmetric in the small but symmetric in the large, when retailers face costs of price adjustments. Such retailers will not adjust prices for small changes in their costs. Upstream manufacturers then see a region of inelastic demand where small wholesale price changes do not translate into commensurate retail price changes. The implication is asymmetric - small wholesale increases are more profitable because manufacturers will not lose customers from higher retail prices; yet, small wholesale decreases are less profitable, because these will not create lower retail prices, hence no extra revenue from greater sales. For larger changes, this asymmetry at wholesale vanishes as the costs of changing prices are compensated by increases in retailers' revenue that result from correspondingly large retail price changes. We first present a formal economic model of a channel with forward looking retailers facing costs of price adjustment to derive the testable propositions. Next, we test these on manufacturer prices in a supermarket scanner dataset to find support for our theory. We discuss the contributions of the results for the asymmetric pricing, distribution channels and cost of price adjustment literatures, and implications for public policy.

Keywords: Asymmetric pricing, channel pricing, costs of price adjustment, menu costs, wholesale prices, channels of distribution, retailing, scanner data

JEL Classification: E31, E12, L11, L16, L22, L81, M21, M31

Suggested Citation

Ray, Sourav and Chen, Haipeng (Allan) and Bergen, Mark E. and Levy, Daniel, Asymmetric Wholesale Pricing: Theory and Evidence (January 2005). Bar-Ilan University Economics Working Paper No. 2-05, Emory University Economics Working Paper No. 05-13, Available at SSRN: https://ssrn.com/abstract=691984 or http://dx.doi.org/10.2139/ssrn.691984

Sourav Ray

McMaster University - DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
905-525-9140 x 22370 (Phone)
905-521-8995 (Fax)

Haipeng (Allan) Chen

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States

Mark E. Bergen

University of Minnesota - Carlson School of Management ( email )

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

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 )

Wilfrid Laurier University
75 University Ave W.
Waterloo, Ontario N2L3C5
Canada

HOME PAGE: http://rcea.org/

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