Price Frictions and the Success of New Products

The literature has documented that price frictions limit the frequency of price changes. We show that they are also associated with the failure of new products. Using the IRI academic data set, we identify new products that have low initial sales. When price frictions are high, retailers are less likely to adjust the price, and instead are more likely to discontinue the new product. We replicate the results by investigating retailer price and product line adjustments following the opening of a new store. We investigate three settings in which retailers may be reluctant to adjust prices on a new product: (a) when there are no price changes on related products, (b) when state-level pricing laws require price stickers on each package, and (c) when the initial prices end in 99¢. The sources of variation are very different across these settings, ranging from the timing of wholesale price changes to variation in state consumer protection laws to kinks in the demand curve associated with 99¢ price endings. Despite this diversity, our findings are consistent, suggesting that larger price frictions coincide with a higher probability that new items are discontinued when initial sales are low. This consistency leads us to conclude that it is more plausible that the effect is causal, rather than an artifact of endogeneity.