Asymmetric Wholesale Pricing: Theory and Evidence
AbstractAsymmetric pricing is the phenomenon where prices rise more readily than they fall. We articulate, and provide empirical support for, a theory of asymmetric pricing in wholesale prices. In particular, we show how wholesale prices may be asymmetric in the small but symmetric in the large, when retailers face costs of price adjustments. Such retailers will not adjust prices for small changes in their costs. Upstream manufacturers then see a region of inelastic demand where small wholesale price changes do not translate into commensurate retail price changes. The implication is asymmetric – small wholesale increases are more profitable because manufacturers will not lose customers from higher retail prices; yet, small wholesale decreases are less profitable, because these will not create lower retail prices, hence no extra revenue from greater sales. For larger changes, this asymmetry at wholesale vanishes as the costs of changing prices are compensated by increases in retailers’ revenue that result from correspondingly large retail price changes. We first present a formal economic model of a channel with forward looking retailers facing costs of price adjustment to derive the testable propositions. Next, we test these on manufacturer prices in a supermarket scanner dataset to find support for our theory. We discuss the contributions of the results for the asymmetric pricing, distribution channels and cost of price adjustment literatures, and implications for public policy.
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Bibliographic InfoPaper provided by EconWPA in its series Macroeconomics with number 0503021.
Length: 103 pages
Date of creation: 24 Mar 2005
Date of revision:
Note: Type of Document - pdf; pages: 103
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Asymmetric Pricing; Channel Pricing; Costs of Price Adjustment; Menu Costs; Wholesale Prices; Channels of Distribution; Retailing; Scanner Data;
Other versions of this item:
- Sourav Ray & Haipeng (Allan) Chen & Mark Bergen & Daniel Levy, 2005. "Asymmetric Wholesale Pricing: Theory and Evidence," Emory Economics 0513, Department of Economics, Emory University (Atlanta).
- Sourav Ray & Haipeng (Allan) Chen & Mark Bergen & Daniel Levy, 2005. "Asymmetric Wholesale Pricing: Theory and Evidence," Working Papers 2005-02, Department of Economics, Bar-Ilan University.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- 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
- 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
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-04-16 (All new papers)
- NEP-IND-2005-04-16 (Industrial Organization)
- NEP-MAC-2005-04-16 (Macroeconomics)
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