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The Anatomy of a Price Cut: Discovering Organizational Sources of the Costs of Price Adjustment

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Author Info
Mark J. Zbaracki
Mark Bergen
Daniel Levy ()

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Abstract

The fact that organizations find it hard to change in response to shocks in the environment is a crucial feature of the economy. Yet we know little about why it is so difficult for organizations to adjust, and where these limitations come from. In an effort to discover some of these reasons we ground ourselves in the context of price adjustment, and present a qualitative analysis of an intensive ethnographic field study of the pricing practices at a one-billion dollar Midwestern industrial manufacturing firm and its customers. We go into depth on a specific episode, a price cut, which most vividly exemplifies the themes that emerged from our data. In the specific situation, market forces clearly dictate that the firm should cut prices, and everyone in the firm agrees with this assessment, suggesting a fairly straightforward price adjustment decision. Yet when we look deeper, and dissect how the firm implemented the price cut, we uncover a rich tapestry of frictions hidden within the organization. At their core, these frictions relate to how managers, in the context of an organization, attempt to apply the fundamental elements of economic theory. Essentially they face a series of constraints that make sense in the context of an organization trying to make these adjustments, but constraints that are rarely articulated or incorporated into economic understanding of price adjustment. We discover that the largest barriers to price adjustment are related to disputes arising from collisions between "partial models" used by different organizational participants as they confront fundamental economic issues. Often, these issues have not been settled and exist in a tenuous truce within the organization – and adjustment requires the organization to deal with them in order to react to these changes.

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Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 0610.

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Date of creation: Aug 2006
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Handle: RePEc:emo:wp2003:0610

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  4. Stiglitz, Joseph E, 1984. "Price Rigidities and Market Structure," American Economic Review, American Economic Association, vol. 74(2), pages 350-55, May. [Downloadable!] (restricted)
  5. Gordon, Robert J, 1990. "What Is New-Keynesian Economics?," Journal of Economic Literature, American Economic Association, vol. 28(3), pages 1115-71, September. [Downloadable!] (restricted)
  6. Mark Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2004. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," Macroeconomics 0402020, EconWPA. [Downloadable!]
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  7. Sheshinski, E. & Weiss, Y., 1990. "Staggered And Synchronized Price Policies Under Inflation: The Multiproduct Monopoly Case," Papers 35-90, Tel Aviv.
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  8. Rotemberg, Julio J., 2005. "Customer anger at price increases, changes in the frequency of price adjustment and monetary policy," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 829-852, May. [Downloadable!] (restricted)
  9. Slade, Margaret E, 1998. "Optimal Pricing with Costly Adjustment: Evidence from Retail-Grocery Prices," Review of Economic Studies, Blackwell Publishing, vol. 65(1), pages 87-107, January. [Downloadable!] (restricted)
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  10. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October. [Downloadable!] (restricted)
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  11. Ball, Laurence & Mankiw, N. Gregory, 1994. "A sticky-price manifesto," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 127-151, December. [Downloadable!] (restricted)
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  12. Dennis W. Carlton, 1987. "The Theory and the Facts of How Markets Clear: Is Industrial Organization Valuable for Understanding Macroeconomics?," NBER Working Papers 2178, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Kashyap, Anil K, 1995. "Sticky Prices: New Evidence from Retail Catalogs," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 245-74, February. [Downloadable!] (restricted)
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  14. Dotsey, Michael & King, Robert G., 2005. "Implications of state-dependent pricing for dynamic macroeconomic models," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 213-242, January. [Downloadable!] (restricted)
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  15. Sheshinski, Eytan & Weiss, Yoram, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Blackwell Publishing, vol. 44(2), pages 287-303, June. [Downloadable!] (restricted)
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  17. Ball, Laurence & Gregory Mankiw, N. & Reis, Ricardo, 2005. "Monetary policy for inattentive economies," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 703-725, May. [Downloadable!] (restricted)
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  18. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, vol. 76(4), pages 637-58, September. [Downloadable!] (restricted)
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  19. Julio Rotemberg, 1987. "The New Keynesian Microfoundations," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 69-116 National Bureau of Economic Research, Inc. [Downloadable!]
  20. Amato, Jeffery D. & Laubach, Thomas, 2003. "Rule-of-thumb behaviour and monetary policy," European Economic Review, Elsevier, vol. 47(5), pages 791-831, October. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Daniel Levy & Sourav Ray & Haipeng (Allan) Chen & Mark Bergen, 2007. "Asymmetric Price Adjustment in the Small," Emory Economics 0703, Department of Economics, Emory University (Atlanta). [Downloadable!]
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  2. Levy, Daniel & Müller, Georg & Chen, Allan (Haipeng) & Bergen, Mark & Dutta, Shantanu, 2008. "Holiday Price Rigidity and Cost of Price Adjustment," MPRA Paper 13095, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  3. Mark J. Zbaracki, 2007. "A sociological view of costs of price adjustment: contributions from grounded theory methods," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(6), pages 553-567. [Downloadable!]
  4. Levy, Daniel, 2007. "Price adjustment under the table: Evidence on efficiency-enhancing corruption," MPRA Paper 1648, University Library of Munich, Germany. [Downloadable!]
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  5. Richard Dennis, 2008. "The Frequency Of Price Adjustment And New Keynesian Business Cycle Dynamics," CAMA Working Papers 2008-19, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
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  6. Georg Müller & Mark Bergen & Shantanu Dutta & Daniel Levy, 2007. "Non-price rigidity and cost of adjustment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 817-832. [Downloadable!]
  7. Daniel Levy, 2007. "Price rigidity and flexibility: new empirical evidence," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 639-647. [Downloadable!]
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  8. Georg Müller & Mark Bergen & Shantanu Dutta & Daniel Levy, 2006. "Holiday Non-Price Rigidity and Cost of Adjustment," Emory Economics 0612, Department of Economics, Emory University (Atlanta). [Downloadable!]
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