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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)

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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File URL: http://128.118.178.162/eps/mac/papers/0402/0402020.pdf
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Bibliographic Info

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

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Length: 48 pages
Date of creation: 07 Feb 2004
Date of revision:
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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Web page: http://128.118.178.162

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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References

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