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The Relation between Inventory Investment and Price Dynamics in a Distributive Firm

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  • Tonogi, Akiyuki

Abstract

In this paper, we examine the role of inventory in the price-setting behavior of a distributive firm. Empirically, we show that probability of price change has a positive relation to the scale of the retailer’s storage and the frequency of its bargain sales. We also show a negative relation between the frequency of bargain sales and the price elasticity of demand. These results denote that price stickiness varies by the retailers’ characteristics. In this paper, we consider that the hidden mechanism of price stickiness comes from the retailer’s policy for inventory investment. We develop a partial equilibrium model of the retailer’s optimization behavior with inventory and financial restrictions. The results of the numerical experiments suggest that price change frequency depends on the retailer’s order cost, storage cost, and menu cost.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/25668/1/ifd_wp008.pdf
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Bibliographic Info

Paper provided by Research Center for Price Dynamics, Institute of Economic Research, Hitotsubashi University in its series Research Center for Price Dynamics Working Paper Series with number 8.

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Length: 26 p.
Date of creation: Apr 2013
Date of revision:
Handle: RePEc:hit:rcpdwp:8

Note: April, 2013
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Keywords: Inventory; Price Stickiness; Numerical Experiment; (S; s) Policy;

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  1. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-79, September.
  2. Virgiliu Midrigan & Oleksiy Kryvtsov, 2008. "Inventories, Markups, and Real Rigidities in Menu Cost Models," 2008 Meeting Papers 487, Society for Economic Dynamics.
  3. Abe, Naohito & Tonogi, Akiyuki, 2010. "Micro and macro price dynamics in daily data," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 716-728, September.
  4. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
  5. 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.
  6. Anil K. Kashyap, 1991. "Sticky prices: new evidence from retail catalogs," Working Paper Series, Macroeconomic Issues 91-26, Federal Reserve Bank of Chicago.
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