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The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains

Author

Listed:
  • Daniel Levy

    (Bar-Ilan University)

  • Mark Bergen

    (University of Minnesota)

  • Shantanu Dutta

    (University of Sourthern California)

  • Robert Venable

    (Robert W. Baird, Co.)

Abstract

We use store-level data to document the exact process of changing prices and to directly measure menu costs at five multi-store supermarket chains. We show that changing prices in these establishments is a complex process, requiring dozens of steps and a nontrivial amount of resources. The menu costs average $105,887/year per store, comprising 0.70% of revenues, 35.2% of net margins, and $0.52/price change. These menu costs may be forming a barrier to price changes. Specifically, (1) a supermarket chain facing higher menu costs (due to item pricing laws which require a separate price tag on each item) changes prices 2 1/2 times less frequently than the other four chains; (2) within this chain, the prices of products exempt from the law are changed over three times more frequently than the products subject to the law.

Suggested Citation

  • Daniel Levy & Mark Bergen & Shantanu Dutta & Robert Venable, 2005. "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," Macroeconomics 0505012, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpma:0505012
    Note: Type of Document - pdf; pages: 38
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/mac/papers/0505/0505012.pdf
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    Keywords

    Menu Cost; Posted Prices; Multiproduct Retailer; Price Rigidity; Sticky Prices; Rigid Prices; Cost of Price Adjustment; New Keynesian Economics; Time Dependent Pricing;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • 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
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness

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