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 nonholiday 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.
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13095.
Find related papers by JEL classification: L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure M31 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Marketing E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics
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Cited by: (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.)
Daniel Levy & Dongwon Lee & Haipeng Chen & Robert Kauffman & Mark Bergen, 2008.
"Price Points and Price Rigidity,"
Emory Economics
0809, Department of Economics, Emory University (Atlanta).
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Other versions:
Levy, Daniel & Lee, Dongwon & Chen, Allan (Haipeng) & Kauffman, Robert & Bergen, Mark, 2007.
"Price Points and Price Rigidity,"
MPRA Paper
1472, University Library of Munich, Germany.
[Downloadable!]
Daniel Levy & Dongwon Lee & Haipeng Allan Chen & Robert J. Kauffman & Mark Bergen, 2007.
"Price Points and Price Rigidity,"
Working Paper Series
04-07, Rimini Centre for Economic Analysis, revised Jul 2007.
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