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Hot and Spicy: Ups and Downs on the Price Floor and Ceiling at Japanese Supermarkets

Listed author(s):
  • Kenn Ariga
  • Kenji Matsui
  • Makoto Watanabe

This paper develops a model of dynamic pricing with menu cost for a monopolistic retail store. By examining the prices of two brands of curry paste, the model shows that frequent price changes appear to be the optimal price policy. The key reason behind this strategy is that customers differ in their willingness to pay, depending on whether they purchase the product for immediate consumption or to add to their inventory at home. The empirical results strongly support the model’s predictions that: (1) stores tend to lower prices when (a) the share of customers still holding inventory is low, and when (b) the expected number of customers is high; and (2) demand is negatively dependent on the duration of the lower price and positively dependent on the duration of the higher, regular price. Unlike in models that posit a negative dependence of current demand on past prices, the findings support the theory that inventory accumulation (when the price is low) and decumulation (when the price is high) drive short-run fluctuations in demand.

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Paper provided by Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University in its series Asia Pacific Economic Papers with number 316.

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Length: 48 pages
Date of creation: Jun 2001
Handle: RePEc:csg:ajrcau:316
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  1. Martin Pesendorfer, 2002. "Retail Sales: A Study of Pricing Behavior in Supermarkets," The Journal of Business, University of Chicago Press, vol. 75(1), pages 33-66, January.
  2. Victor Aguirregabiria, 1999. "The Dynamics of Markups and Inventories in Retailing Firms," Review of Economic Studies, Oxford University Press, vol. 66(2), pages 275-308.
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