This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Beyond the Cost of Price Adjustment: Investments in Pricing Capital

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Mark Zbaracki (The Wharton)
Mark Bergen (University of Minnesota)
Shantanu Dutta (University of Sourthern California)
Daniel Levy (Bar-Ilan University)
Mark Ritson (London Business School)

Additional information is available for the following registered author(s):

Abstract

The literature on costs of price adjustment has long argued that changing prices is a complex and costly process. In fact, some authors have suggested that we should think of firms’ price-setting activities as “producing” prices, similar to the way firms use production processes to produce goods and services. In this paper we explore one natural extension of this view, that besides observing costs of price adjustment, we should also expect to see firm-level investments in capital expenditures into these “pricing” production processes. We coin the term “pricing capital” for these investments, and suggest that they can improve the efficiency of the “pricing production” activities by both reducing the costs of adjusting prices, and improving the effectiveness of price adjustments in future periods. Using two types of data sources, we find compelling evidence of the existence as well as the importance of pricing capital in firms. The existence of firm-level “pricing capital” has the potential of fundamentally altering the way we think about pricing and price adjustment in many areas of economics. It suggests looking toward the “pricing capital” to decipher the likely degree and causes of price rigidity and its variation across price setters, markets, and industries. Moreover, “pricing capital” introduces a new, higher-level, pricing decision made by individual firms. Decisions to invest in pricing capital compete with traditional capital investment decisions that have long been studied in economics, such as capital investments in plant, equipment, and R&D. Furthermore, since pricing capital is a choice variable, it implies that costs of price adjustment often used in models of price rigidity are endogenous. As such, pricing capital offers new insights into the micro-foundations of the costs of price adjustment. The most provocative implication of the new theory of pricing, however, is that the allocative efficiency of the price system itself may be determined endogenously by individual price setters who choose whether and how much to invest in pricing capital.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://129.3.20.41/eps/mac/papers/0505/0505013.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by EconWPA in its series Macroeconomics with number 0505013.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 37 pages
Date of creation: 15 May 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0505013

Note: Type of Document - pdf; pages: 37
Contact details of provider:
Web page: http://129.3.20.41

For technical questions regarding this item, or to correct its listing, contact: (EconWPA).

Related research
Keywords: Cost of Price Adjustment; Menu Cost; Managerial and Customer Costs of Price Adjustment; Pricing Capital; Pricing Production Process (PPP); Price Rigidity; Sticky Prices; Rigid Prices; Microfoundations of the Costs of Price Adjustment; Allocative Efficiency; Price System; Endogenous Price Adjustment Cost;

Other versions of this item:

Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D4 - Microeconomics - - Market Structure and Pricing
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

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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.:
  1. Leif Danziger, 1999. "A Dynamic Economy with Costly Price Adjustments," American Economic Review, American Economic Association, vol. 89(4), pages 878-901, September. [Downloadable!] (restricted)
    Other versions:
  2. Rao, Vithala R, 1984. "Pricing Research in Marketing: The State of the Art," Journal of Business, University of Chicago Press, vol. 57(1), pages S39-60, January. [Downloadable!] (restricted)
  3. Cecchetti, Stephen G., 1986. "The frequency of price adjustment : A study of the newsstand prices of magazines," Journal of Econometrics, Elsevier, vol. 31(3), pages 255-274, April. [Downloadable!] (restricted)
  4. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September. [Downloadable!] (restricted)
  5. repec:fth:coluec:508 is not listed on IDEAS
  6. Caballero, Ricardo J & Engel, Eduardo M R A, 1991. "Dynamic (S, s) Economies," Econometrica, Econometric Society, vol. 59(6), pages 1659-86, November. [Downloadable!] (restricted)
    Other versions:
  7. Caplin, Andrew & Leahy, John, 1991. "State-Dependent Pricing and the Dynamics of Money and Output," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 683-708, August. [Downloadable!] (restricted)
    Other versions:
  8. Jonathan L. Willis, 2000. "Estimation of adjustment costs in a model of state-dependent pricing," Research Working Paper RWP 00-07, Federal Reserve Bank of Kansas City. [Downloadable!]
  9. Bennett T. McCallum, 1987. "On "Real" and "Sticky-Price" Theories of the Business Cycle," NBER Working Papers 1933, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Andrew Caplin & John Leahy, 1994. "The Economics of Adjustment," NBER Working Papers 4687, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  11. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," NBER Working Papers 8290, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  12. Caplin, A., 1992. "Individual Inertia and Aggregate Dynamics," Discussion Papers 1992_16, Columbia University, Department of Economics.
  13. Sheshinski, E. & Weiss, Y., 1990. "Staggered And Synchronized Price Policies Under Inflation: The Multiproduct Monopoly Case," Papers 35-90, Tel Aviv.
    Other versions:
  14. Gordon, Robert J, 1990. "What Is New-Keynesian Economics?," Journal of Economic Literature, American Economic Association, vol. 28(3), pages 1115-71, September. [Downloadable!] (restricted)
  15. Mark Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2004. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," Macroeconomics 0402020, EconWPA. [Downloadable!]
    Other versions:
  16. Caplin, Andrew S & Spulber, Daniel F, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 703-25, November. [Downloadable!] (restricted)
    Other versions:
  17. Haddock, David D & McChesney, Fred S, 1994. "Why Do Firms Contrive Shortages? The Economics of Intentional Mispricing," Economic Inquiry, Oxford University Press, vol. 32(4), pages 562-81, October.
  18. Daniel Levy & Shantanu Dutta & Mark Bergen & Robert Venable, 2005. "Price Adjustment at Multiproduct Retailers," Industrial Organization 0505005, EconWPA. [Downloadable!]
    Other versions:
  19. Slade, Margaret E, 1998. "Optimal Pricing with Costly Adjustment: Evidence from Retail-Grocery Prices," Review of Economic Studies, Blackwell Publishing, vol. 65(1), pages 87-107, January. [Downloadable!] (restricted)
    Other versions:
  20. repec:fth:coluec:600 is not listed on IDEAS
  21. Allan H. Meltzer, 1995. "Information, sticky prices and macroeconomic foundations," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 101-118. [Downloadable!]
  22. Simon Hall & Mark Walsh & Anthony Yates, . "How do UK companies set prices?," Bank of England working papers 67, Bank of England. [Downloadable!]
  23. Ball, Laurence & Mankiw, N. Gregory, 1994. "A sticky-price manifesto," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 127-151, December. [Downloadable!] (restricted)
    Other versions:
  24. Dennis W. Carlton, 1987. "The Theory and the Facts of How Markets Clear: Is Industrial Organization Valuable for Understanding Macroeconomics?," NBER Working Papers 2178, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  25. Kashyap, Anil K, 1995. "Sticky Prices: New Evidence from Retail Catalogs," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 245-74, February. [Downloadable!] (restricted)
    Other versions:
  26. Mankiw, N Gregory, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 529-38, May. [Downloadable!] (restricted)
  27. Krusell, Per & Smith, Anthony Jr., 1996. "Rules of thumb in macroeconomic equilibrium A quantitative analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 20(4), pages 527-558, April. [Downloadable!] (restricted)
  28. Ball, Laurence & Romer, David, 1990. "Real Rigidities and the Non-neutrality of Money," Review of Economic Studies, Blackwell Publishing, vol. 57(2), pages 183-203, April. [Downloadable!] (restricted)
    Other versions:
  29. Andrew Caplin & John Leahy, 1997. "Aggregation and Optimization with State-Dependent Pricing," Econometrica, Econometric Society, vol. 65(3), pages 601-626, May.
    Other versions:
  30. Sheshinski, Eytan & Weiss, Yoram, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Blackwell Publishing, vol. 44(2), pages 287-303, June. [Downloadable!] (restricted)
  31. Levy, Daniel, et al, 1997. "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 791-825, August.
    Other versions:
  32. Lach, Saul & Tsiddon, Daniel, 1996. "Staggering and Synchronization in Price-Setting: Evidence from Multiproduct Firms," American Economic Review, American Economic Association, vol. 86(5), pages 1175-96, December. [Downloadable!] (restricted)
    Other versions:
  33. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, vol. 76(4), pages 637-58, September. [Downloadable!] (restricted)
    Other versions:
  34. Akerlof, George A & Yellen, Janet L, 1985. "A Near-rational Model of the Business Cycle, with Wage and Price Intertia," The Quarterly Journal of Economics, MIT Press, vol. 100(5), pages 823-38, Supp.. [Downloadable!] (restricted)
  35. Danziger, Leif, 1988. "Costs of Price Adjustment and the Welfare Economics of Inflation and Disinflation," American Economic Review, American Economic Association, vol. 78(4), pages 633-46, September. [Downloadable!] (restricted)
  36. Julio Rotemberg, 1987. "The New Keynesian Microfoundations," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 69-116 National Bureau of Economic Research, Inc. [Downloadable!]
  37. Dutta, Shantanu, et al, 1999. "Menu Costs, Posted Prices, and Multiproduct Retailers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(4), pages 683-703, November.
    Other versions:
  38. Parkin, Michael, 1986. "The Output-Inflation Trade-off When Prices Are Costly to Change," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 200-224, February. [Downloadable!] (restricted)
  39. Greenwald, Bruce & Stiglitz, Joseph E, 1993. "New and Old Keynesians," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 23-44, Winter. [Downloadable!] (restricted)
  40. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December. [Downloadable!] (restricted)
Full references

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.)

  1. Bergen, Mark & Levy, Daniel & Ray, Sourav & Rubin, Paul & Zeliger, Ben, 2006. "When Little Things Mean a Lot: On the Inefficiency of Item Pricing Laws," MPRA Paper 1158, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  2. Mark Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2004. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," Macroeconomics 0402020, EconWPA. [Downloadable!]
    Other versions:
  3. Mark Ritson & Mark Zbaracki & Shantanu Dutta & Daniel Levy & Mark Bergen, 2005. "The Three Capitals of Pricing – Human, Systems and Social Capital," Macroeconomics 0505014, EconWPA. [Downloadable!]
Statistics
Access and download statistics

Did you know? IDEAS uses the data collected within the RePEc project, the largest online bibliographic database in Economics.

This page was last updated on 2009-11-3.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.