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Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets

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Author Info
Mark Zbaracki (Pennsylvania)
Mark Ritson (London Business School)
Daniel Levy (Bar-Ilan & Emory)
Shantanu Dutta (USC)
Mark Bergen (Minnesota)

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Abstract

We study the price adjustment practices and provide quantitative measurement of the managerial and customer costs of price adjustment using data from a large U.S. industrial manufacturer and its customers. We find that price adjustment costs are a much more complex construct than the existing industrial organization or the macroeconomics literature recognizes. In addition to physical costs ("menu costs"), we identify and measure three types of managerial costs—information gathering, decision-making and communication costs, and two types of customer costs—communication, and negotiation costs. We find that the managerial costs are more than six times, and customer costs are more than twenty times, the menu costs. In total, the price adjustment costs comprise 1.22 percent of the company’s revenue and 20.03 percent of the company’s net margin. We show that many components of the managerial and customer costs are convex, while the menu costs are not. We also document the link between price adjustment costs and price rigidity. Finally, we provide evidence of managers’ fear of "antagonizing" customers.

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Paper provided by EconWPA in its series Macroeconomics with number 0402020.

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Length: 48 pages
Date of creation: 07 Feb 2004
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Handle: RePEc:wpa:wuwpma:0402020

Note: Type of Document - pdf; prepared on Win 98; to print on Any printer; pages: 48 ; figures: There are no figures
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Related research
Keywords: Menu Cost; Cost of Price Adjustment; Managerial Cost; Customer Cost; Information Gathering Cost; Information Processing Cost; Decision Making Cost; Communication Cost; Thinking Cost; Negotiation Cost; Customer Antagonization Cost; Convex Cost of Price Adjustment; Sticky Prices; Price Rigidity;

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Find related papers by JEL classification:
E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
F31 - International Economics - - International Finance - - - Foreign Exchange
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics
M31 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Marketing

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References listed on IDEAS
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