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


  • 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.

Suggested Citation

  • Kenn Ariga & Kenji Matsui & Makoto Watanabe, 2001. "Hot and Spicy: Ups and Downs on the Price Floor and Ceiling at Japanese Supermarkets," Asia Pacific Economic Papers 316, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:csg:ajrcau:316

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    References listed on IDEAS

    1. 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.
    2. 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.
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    Cited by:

    1. Francesco Nava & Pasquale Schiraldi, 2014. "Sales And Collusion In A Market With Storage," Journal of the European Economic Association, European Economic Association, vol. 12(3), pages 791-832, June.
    2. Emmanuel Dhyne & Jerzy Konieczny & Fabio Rumler & Patrick Sevestre, 2009. "Price rigidity in the euro area - An assessment," European Economy - Economic Papers 2008 - 2015 380, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    3. Kota Watanabe & Tsutomu Watanabe, 2014. "We construct a Törnqvist daily price index using Japanese point of sale (POS) scannerdata spanning from 1988 to 2013. We find the following. First, the POS based inflation rate tends to be about 0.5 ," CARF F-Series CARF-F-342, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    4. Kenn Ariga & Kenji Matsui, 2003. "Mismeasurement of the CPI," NBER Working Papers 9436, National Bureau of Economic Research, Inc.
    5. Martin Eichenbaum & Nir Jaimovich & Sergio Rebelo, 2011. "Reference Prices, Costs, and Nominal Rigidities," American Economic Review, American Economic Association, vol. 101(1), pages 234-262, February.
    6. Kota Watanabe & Tsutomu Watanabe, 2014. "Estimating Daily Inflation Using Scanner Data: A Progress Report," UTokyo Price Project Working Paper Series 020, University of Tokyo, Graduate School of Economics.
    7. Judith A. Chevalier & Anil K. Kashyap & Peter E. Rossi, 2003. "Why Don't Prices Rise During Periods of Peak Demand? Evidence from Scanner Data," American Economic Review, American Economic Association, vol. 93(1), pages 15-37, March.
    8. Watanabe, Makoto, 2008. "Inflation, price competition, and consumer search technology," Journal of Economic Dynamics and Control, Elsevier, vol. 32(12), pages 3780-3806, December.
    9. Abe, Naohito & Kawaguchi, Daiji, 2010. "Incumbent's price response to new entry: The case of Japanese supermarkets," Journal of the Japanese and International Economies, Elsevier, vol. 24(2), pages 196-212, June.
    10. Loy, Jens-Peter & Weaver, Robert D., 2002. "Food Retail Sales (Pricing): Theory And Empirical Evidence For German Grocery Stores," 2002 Annual meeting, July 28-31, Long Beach, CA 19787, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    11. James Albrecht & Fabien Postel‐Vinay & Susan Vroman, 2013. "An Equilibrium Search Model Of Synchronized Sales," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(2), pages 473-493, May.

    More about this item

    JEL classification:

    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce


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