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Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets

Author

Listed:
  • Mark J Zbaracki
  • Mark Ritson
  • Daniel Levy

    (RCEA - Rimini Center for Economic Analysis, Emory University [Atlanta, GA], Bar-Ilan University [Israël])

  • Shantanu Dutta

    (FBE, Marshall School of Business - USC - University of Southern California)

  • Mark Bergen

    (Carlson School of Management - UMN - University of Minnesota [Twin Cities] - UMN - University of Minnesota System)

Abstract

We study the price adjustment practices and provide quantitative measurement of the managerial and customer costs of price adjustment using data from a large U.S. industrial manufacturer and its customers. We find that price adjustment costs are a much more complex construct than the existing industrial-organization or macroeconomics literature recognizes. In addition to physical costs (menu costs), we identify and measure three types of managerial costs (information gathering, decision-making, and communication costs) and two types of customer costs (communication and negotiation costs). We find that the managerial costs are more than 6 times, and customer costs are more than 20 times, the menu costs. In total, the price adjustment costs comprise 1.22% of the company's revenue and 20.03% of the company's net margin. We show that many components of the managerial and customer costs are convex, whereas the menu costs are not. We also document the link between price adjustment costs and price rigidity. Finally, we provide evidence of managers' fear of antagonizing customers.

Suggested Citation

  • Mark J Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2004. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," Post-Print hal-02386836, HAL.
  • Handle: RePEc:hal:journl:hal-02386836
    DOI: 10.1162/003465304323031085
    Note: View the original document on HAL open archive server: https://hal.science/hal-02386836
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    More about this item

    Keywords

    Menu Cost; Cost of Price Adjustment; Sticky Prices; Rigid Prices; Price Rigidity; Price Stickiness; Customer Antagonization Cost; Convex Costs of Price Adjustment; Customer Costs of Price Adjustment; Managerial Costs of Price Adjustment;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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