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Hot and Spicy: Ups and Downs on the Price Floor and Ceiling at Japanese Supermarkets

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  • Kenn Ariga
  • Kenji Matsui
  • Makoto Watanabe

Abstract

This paper develops a model of dynamic pricing with menu cost for a monopolistic retail store. By examining the prices of two brands of curry paste, the model shows that frequent price changes appear to be the optimal price policy. The key reason behind this strategy is that customers differ in their willingness to pay, depending on whether they purchase the product for immediate consumption or to add to their inventory at home. The empirical results strongly support the model’s predictions that: (1) stores tend to lower prices when (a) the share of customers still holding inventory is low, and when (b) the expected number of customers is high; and (2) demand is negatively dependent on the duration of the lower price and positively dependent on the duration of the higher, regular price. Unlike in models that posit a negative dependence of current demand on past prices, the findings support the theory that inventory accumulation (when the price is low) and decumulation (when the price is high) drive short-run fluctuations in demand.

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File URL: https://crawford.anu.edu.au/pdf/pep/pep-316.pdf
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Bibliographic Info

Paper provided by Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University in its series Asia Pacific Economic Papers with number 316.

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Length: 48 pages
Date of creation: Jun 2001
Date of revision:
Handle: RePEc:csg:ajrcau:316

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References

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  1. Martin Pesendorfer, 2002. "Retail Sales: A Study of Pricing Behavior in Supermarkets," The Journal of Business, University of Chicago Press, vol. 75(1), pages 33-66, January.
  2. Aguirregabiria, Victor, 1999. "The Dynamics of Markups and Inventories in Retailing Firms," Review of Economic Studies, Wiley Blackwell, vol. 66(2), pages 275-308, April.
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Citations

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Cited by:
  1. Makoto Watanabe, 2006. "Inflation, Price Competition and Consumer Search Technology," Economics Working Papers we065623, Universidad Carlos III, Departamento de Economía.
  2. Francesco Nava & Pasquale Schiraldi, 2011. "Sales and Collusion in a Market with Storage," STICERD - Theoretical Economics Paper Series /2011/549, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  3. Judith A. Chevalier & Anil K. Kashyap & Peter E. Rossi, 2003. "Why Don't Prices Rise During Periods of Peak Demand? Evidence from Scanner Data," American Economic Review, American Economic Association, vol. 93(1), pages 15-37, March.
  4. Loy, Jens-Peter & Weaver, Robert D., 2002. "Food Retail Sales (Pricing): Theory And Empirical Evidence For German Grocery Stores," 2002 Annual meeting, July 28-31, Long Beach, CA 19787, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  5. Kota Watanabe & Tsutomu Watanabe, 2014. "We construct a Törnqvist daily price index using Japanese point of sale (POS) scannerdata spanning from 1988 to 2013. We find the following. First, the POS based inflation rate tends to be about 0.," CARF F-Series CARF-F-342, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  6. Abe, Naohito & Kawaguchi, Daiji, 2010. "Incumbent's price response to new entry: The case of Japanese supermarkets," Journal of the Japanese and International Economies, Elsevier, vol. 24(2), pages 196-212, June.
  7. Martin Eichenbaum & Nir Jaimovich & Sergio Rebelo, 2011. "Reference Prices, Costs, and Nominal Rigidities," American Economic Review, American Economic Association, vol. 101(1), pages 234-62, February.
  8. Emmanuel Dhyne & Jerzy Konieczny & Fabio Rumler & Patrick Sevestre, 2009. "Price rigidity in the euro area - An assessment," European Economy - Economic Papers 380, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  9. Kenn Ariga & Kenji Matsui, 2003. "Mismeasurement of the CPI," NBER Working Papers 9436, National Bureau of Economic Research, Inc.

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