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Asymmetric Wholesale Pricing: Theory and Evidence

Author

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  • Sourav Ray

    (McMaster University)

  • Haipeng (Allan) Chen

    (University of Miami)

  • Mark Bergen

    (University of Minnesota)

  • Daniel Levy

    () (Bar-Ilan University)

Abstract

Asymmetric 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.

Suggested Citation

  • Sourav Ray & Haipeng (Allan) Chen & Mark Bergen & Daniel Levy, 2005. "Asymmetric Wholesale Pricing: Theory and Evidence," Working Papers 2005-02, Bar-Ilan University, Department of Economics.
  • Handle: RePEc:biu:wpaper:2005-02
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    References listed on IDEAS

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    Cited by:

    1. Levy, Daniel & Müller, Georg & Chen, Haipeng (Allan) & Bergen, Mark & Dutta, Shantanu, 2010. "Holiday Price Rigidity and Cost of Price Adjustment," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics, pages 172-198.
    2. Levy, Daniel & Snir, Avichai & Gotler, Alex & Chen, Haipeng (Allan), 2020. "Not all price endings are created equal: Price points and asymmetric price rigidity," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics.
    3. Mark Bergen & Daniel Levy & Sourav Ray & Paul H. Rubin & Benjamin Zeliger, 2008. "When Little Things Mean a Lot: On the Inefficiency of Item-Pricing Laws," Journal of Law and Economics, University of Chicago Press, vol. 51(2), pages 209-250, May.
    4. Bykadorov, Igor & Ellero, Andrea & Moretti, Elena & Vianello, Silvia, 2009. "The role of retailer's performance in optimal wholesale price discount policies," European Journal of Operational Research, Elsevier, vol. 194(2), pages 538-550, April.
    5. Young, Andrew T. & Levy, Daniel, 2014. "Explicit Evidence of an Implicit Contract," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics, pages 804-832.
    6. Daniel Levy & Sourav Ray & Li Wang & Mark Bergen, 2019. "Pricing Better," Working Papers 008-19 JEL Codes: M31, E3, International School of Economics at TSU, Tbilisi, Republic of Georgia.
    7. repec:zbw:espost:206846 is not listed on IDEAS
    8. Saha, Subrata, 2013. "Supply chain coordination through rebate induced contracts," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 50(C), pages 120-137.
    9. B. Verhelst & D. Van Den Poel, 2010. "Price rigidity in Europe and the US: A comparative analysis using scanner data," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 10/684, Ghent University, Faculty of Economics and Business Administration.
    10. da Silva, André Suriane & Vasconcelos, Cláudio Roberto Fóffano & Vasconcelos, Silvinha Pinto & de Mattos, Rogério Silva, 2014. "Symmetric transmission of prices in the retail gasoline market in Brazil," Energy Economics, Elsevier, vol. 43(C), pages 11-21.
    11. Anil Arya & Brian Mittendorf & David E. M. Sappington, 2007. "The Bright Side of Supplier Encroachment," Marketing Science, INFORMS, vol. 26(5), pages 651-659, 09-10.
    12. Arthur Fishman & Nadav Levy, 2011. "Search Costs and Risky Investment in Quality," Working Papers 2011-04, Bar-Ilan University, Department of Economics.
    13. Liang Guo, 2009. "The Benefits of Downstream Information Acquisition," Marketing Science, INFORMS, vol. 28(3), pages 457-471, 05-06.
    14. Claire Loupias & Patrick Sevestre, 2013. "Costs, Demand, and Producer Price Changes," The Review of Economics and Statistics, MIT Press, vol. 95(1), pages 315-327, March.
    15. Young, Andrew T. & Levy, Daniel, 2014. "Explicit Evidence of an Implicit Contract," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics, pages 804-832.
    16. Chen, Haipeng (Allan) & Levy, Daniel & Ray, Sourav & Bergen, Mark, 2008. "Asymmetric Price Adjustment in the Small," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics, pages 728-737.
    17. Daniel Levy & Haipeng (Allan) Chen & Georg Müller & Shantanu Dutta & Mark Bergen, 2010. "Holiday Price Rigidity and Cost of Price Adjustment," Economica, London School of Economics and Political Science, vol. 77(305), pages 172-198, January.
    18. Lim, Yoonsung & Kim, Jeong-Yoo & Berg, Nathan, 2015. "Price asymmetry revisited from a marketing perspective," Economic Modelling, Elsevier, vol. 49(C), pages 314-319.
    19. Daniel Levy, 2007. "Price rigidity and flexibility: new empirical evidence," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 639-647.
    20. G. R. Chen, 2016. "Dynamic Model for Market Competition and Price Rigidity," Applied Economics, Taylor & Francis Journals, vol. 48(36), pages 3485-3496, August.
    21. Christopher Douglas & Ana María Herrera, 2010. "Why are gasoline prices sticky? A test of alternative models of price adjustment," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(6), pages 903-928.
    22. repec:spr:annopr:v:257:y:2017:i:1:d:10.1007_s10479-014-1689-0 is not listed on IDEAS
    23. Chuan He & Johan Marklund & Thomas Vossen, 2008. "—Vertical Information Sharing in a Volatile Market," Marketing Science, INFORMS, vol. 27(3), pages 513-530, 05-06.
    24. Georg Müller & Sourav Ray, 2007. "Asymmetric price adjustment: evidence from weekly product-level scanner price data," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 723-736.

    More about this item

    Keywords

    Asymmetric Pricing; Channel Pricing; Costs of Price Adjustment; Menu Costs; Wholesale Prices; Channels of Distribution; Retailing; Scanner Data;

    JEL classification:

    • 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; Modern Monetary Theory
    • 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; Personnel Economics - - Business Economics - - - Business Economics
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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