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

Mark Zbaracki, Mark Ritson, Daniel Levy (), Shantanu Dutta and Mark Bergen
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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

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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.

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 (search for similar items in EconPapers)
Date: 2004-05
Note: View the original document on HAL open archive server: https://hal.science/hal-02386836
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Published in Review of Economics and Statistics, 2004, 86 (2), pp.514-533. ⟨10.1162/003465304323031085⟩

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Related works:
Journal Article: Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets (2004)
Journal Article: Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets (2004)
Working Paper: Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets (2004)
Working Paper: Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02386836

DOI: 10.1162/003465304323031085

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