Beyond the Cost of Price Adjustment: Investments in Pricing Capital

Review of Economics and Statistics, 2004

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 nd 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 nd 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.

2000

The authors thank the HEC Foundation for its financial support, and Shantanu Sutta and Gilles Laurent for their comments on a previous draft.

International Journal of Industrial Organization, 2011

This paper examines the use of market-share thresholds (safe harbors) in evaluating whether a given vertical practice should be challenged. Such thresholds are typically found in vertical restraints guidelines (e.g., the 2000 Guidelines for the European Commission and the 1985 Guidelines for the U.S. Department of Justice). We consider a model of resale price maintenance (RPM) in which firms employ RPM to dampen downstream price competition. In this model, we find that restrictions on the use of RPM by a dominant firm can be welfare improving, but restrictions on the extent of the market that can be covered by RPM (i.e., the pervasiveness of the practice among firms in the industry) may lead to lower welfare and higher consumer prices than under a laissez-faire policy. Our results thus call into question the indiscriminate use of market-share thresholds in vertical cases.

This study is the first to estimate the empirical effects of minimum resale price maintenance (RPM) across a broad variety of products. We analyze conflicting theories using an exogenous state-level law change resulting from the 2007 Leegin Supreme Court decision. In states where RPM contracts are treated under the more relaxed rule-of-reason standard, prices increased. We estimate the welfare impact and find that, in aggregate, consumers are worse off in the rule-of-reason states. Though welfare decreased and prices increased, we find little support for the broad application of any particular theory. For much of the past century, minimum resale price maintenance (RPM) contracts have been illegal in the United States. For that reason, empirical analysis on the effect of vertical price agreements is sparse. As noted in the literature, " the absence of significant empirical evidence is surely the greatest remaining impediment to a comprehensive analysis of RPM " (Marvel and McCafferty, 1985). This paper advances the analysis of RPM by providing the first estimates of empirical effects across a broad range of goods and by conducting tests of multiple candidate theories. There is disagreement in the existing literature over the effects of minimum RPM on consumer welfare. The welfare-reducing view contends that vertical Syverson for their helpful comments and the Kilts-Nielsen Data Center at The University of Chicago Booth School of Business for providing the data. Information on availability and access to the data are available at http://research.chicagobooth/nielsen/.

2007

The rise of chain and department stores in the 1930s elicited a backlash from small businesses. To protect these retailers from their larger brethren, resale price maintenance (RPM) laws were enacted. While seeming to foster anti-competitive behavior, these contracts may benefit producers through the provision of services by retailers as a form of non-price competition. Event studies under different regulatory regimes to the stock prices of manufacturers that used RPM are used to judged the competitive effects of these laws. The appropriate legal standard for RPM cases is discussed, as is the scope for these contracts to counterbalance big-box retailers today.

Journal of Retailing, 2009

Until recently, retailers have taken an either/or approach to competition: either reacting fiercely to competitive price changes or ignoring them altogether. Today, however, firms make a concerted effort to determine and quantify competitive effects. In this paper, we focus on how pricing and competitive effects interact as a general phenomenon, particularly as it applies to retailing. We attempt to construct a general framework that enhances our understanding of the emerging research issues in the area of pricing and competitive effects, and we examine their implications for practice. The areas that show high promise/opportunity are in the online setting for all types of goods-fashion, perishable and packaged staples, and durables-particularly with respect to pricing for profitability and understanding the impact of competition. Other opportunities include understanding the pricing and competitive effects in the perishable goods category sold in specialty, discount, and convenience stores.

The market structure and pricing are two business aspects that work collaboratively to determine profitability. From the manufacturer and retailer’s point of view, the goal of setting prices is to maximize profits. Manufacturers are top-most market participants that produce goods and services, hence highly influence the market structure. Whether or not two or more manufacturers operate in the same market is largely influenced by the nature of business activity. This paper, therefore, investigates the influences of manufacturing and retail practices on market structure and pricing. In essence, manufacturers determine market elements such as barrier to entry, uniqueness of products and scale economy, all of which are determinants of market structures. Using a quantitative approach, this research analyzes a host of literature to determine pricing strategies by manufacturers and retailers. Furthermore, research examines the four main market structures to determine how retailers and manufacturers affect their formation. The major finding, however, is that manufacturers determine and influence pricing in various ways, most notably by viewing price as a ‘four layer cake’, which includes four main elements: direct costs, manufacturing overheads, non-manufacturing overheads, and profit. Apparently, both manufacturers and retailers use different pricing strategies, with the former affected by manufacturer suggested retail prices.

European Journal of Marketing, 2015

2006

The authors develop a conceptual framework of the factors that motivate a retailer's decision to rely on demand conditions and past prices in setting current and future prices. Specifically, they examine the circumstances under which retailers choose demand-based pricing versus past-price dependence for different brands and categories. Given scarce resources and costs of price adjustments, demand-based pricing is more likely when the customerdriven and firm-driven costs of adjusting pricing patterns are low or when the benefits of such adjustments are high. First, the customer-driven benefits of demand-based pricing are expected to be greater in categories with higher penetration and for brands with higher market share and higher demand sensitivity to price. Second, the firm-driven benefits are greater for categories with higher private-label share. Finally, the customer-driven costs are greater for expensive categories, whereas the firm-driven costs are greater for categories with many stockkeeping units. The empirical findings support the conceptual framework, implying that customer-driven and firm-driven benefits are the main stimulants in the retailer's choice of demand-based pricing. In contrast, customer-driven and firm-driven costs significantly hinder retailer implementation of demand-based pricing. These insights enable retailers to identify problem areas and opportunities to improve the allocation of scarce pricing resources. The results also contribute to the ongoing debate in economics and marketing on the rationality of observed past-price dependence. Whereas previous research points to the negative impact on gross margins of this practice, the authors find that retailers weigh the costs and benefits of demand-based pricing rather than adhere to past-pricing patterns.