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Holiday Price Rigidity and Cost of Price Adjustment
Daniel Levy, Georg Müller, Haipeng Allan Chen, Mark Bergen, Shantanu
Dutta
To cite this version:
Daniel Levy, Georg Müller, Haipeng Allan Chen, Mark Bergen, Shantanu Dutta. Holiday Price Rigid-
ity and Cost of Price Adjustment. Economica, Wiley, 2010, 77 (305), pp.172-198. �10.1111/j.1468-
0335.2008.00738.x�. �hal-02387730�
Holiday Price Rigidity and Cost of Price
Adjustment*
By DANIEL LEVY,† GEORG MÜLLER,‡ HAIPENG (ALLAN) CHEN,††
MARK BERGEN,‡‡ and SHANTANU DUTTA†††
†Bar-Ilan University and Rimini Center for Economic Analysis ‡Monitor Group
††Texas A&M University ‡‡University of Minnesota
†††University of Southern California
Final Version: May 6, 2008
The Thanksgiving-Christmas holiday period is a major sales period for US retailers. Due
to higher store traffic, tasks such as restocking shelves, handling customers’ questions
and inquiries, running cash registers, cleaning, and bagging, become more urgent during
holidays. As a result, the holiday-period opportunity cost of price adjustment may
increase dramatically for retail stores, which should lead to greater price rigidity during
holidays. We test this prediction using weekly retail scanner price data from a major
Midwestern supermarket chain. We find that indeed, prices are more rigid during holiday
periods than non-holiday periods. For example, the econometric model we estimate
suggests that the probability of a price change is lower during holiday periods, even after
accounting for cost changes. Moreover, we find that the probability of a price change
increases with the size of the cost change, during both, the holiday as well as non-holiday
periods. We argue that these findings are best explained by higher price adjustment costs
(menu cost) the retailers face during the holiday periods. Our data provides a natural
experiment for studying variation in price rigidity because most aspects of market
environment such as market structure, industry concentration, the nature of long-term
relationships, contractual arrangements, etc., do not vary between holiday and non-
holiday periods. We, therefore, are able to rule out these commonly used alternative
explanations for the price rigidity, and conclude that the menu cost theory offers the best
explanation for the holiday period price rigidity.
JEL Codes: E12, E31, L16, L11, M31
Key Words: Price Rigidity, Cost of Price Adjustment, Menu Cost, Holiday Period,
Asymmetric Price Adjustment, Monetary Policy
Fo
rthcoming:
Economica 2008
1
INTRODUCTION
“It’s a madhouse during the holidays. There is no time to do anything that is marginal or incremental—you have to
focus on the essential issues, keeping items in stock, keeping the registers manned, and making the store presentable.
The key is to manage the flow of goods and customers through the store.”
Brett Drey, Retail Manager
Holidays are arguably the most important sales periods for US retailers. For example,
Warner and Barsky (1995) suggest that the Thanksgiving-Christmas period is the busiest
shopping period. Chevalier, et al. (2003, p. 20) focusing on the consumption of food,
state that “… Christmas and Thanksgiving represent the overall peak shopping periods
for Dominick’s.” Indeed, our conversations with supermarket managers indicate that
these two holiday periods constitute the busiest shopping period in their stores.
In this paper we focus on pricing decisions during this holiday season. There is a
literature that studies pricing patterns during holiday periods, which focuses on the
increase in demand during holiday periods
—studying how firms incorporate these
demand effects into higher or lower price levels during holiday periods (see, e.g.,
Pashigian and Bowen 1991, Warner and Barsky 1995, and Chevalier, et al. 2003). This
emphasis on the demand side and its implications for holiday pricing is interesting and
important.
We explore a missing piece in this literature—supply side issues during holiday
periods—by focusing on the cost of price adjustment during holiday periods. We argue
that the costs of price adjustment increase during holidays. Due to higher store traffic,
other tasks such as restocking shelves, handling customers’ questions and inquiries,
running cash registers, cleaning, and bagging, become more urgent during holidays and
thus receive priority, which increases the opportunity costs of price adjustment. This
observation is consistent with the existing evidence on price adjustment processes and
their costs in the retail industry (e.g., Levy, et al. 1997). Indeed, statements made by retail
2
pricing managers confirm that their opportunity cost of price adjustment increases
dramatically during holiday periods.
The most direct implication of higher costs of price adjustment should be nominal
price rigidity (Mankiw, 1985; Ball and Mankiw, 1994). Thus, we expect to see greater
price rigidity during holiday periods. We test this hypothesis using weekly scanner data
set consisting of retail and wholesale prices for thousands of products at a large US
supermarket Chain, Dominick’s. Indeed, we find greater price rigidity during the holiday
periods in comparison to the non-holiday periods, as predicted by the menu cost theory.
Much of the recent theoretical work on price rigidity relies on cost of price
adjustment ("menu costs") as a critical theoretical lynchpin (Blinder, et al., 1998).
However, very little is known about the actual empirical relevance of these costs.
According to Fisher and Konieczny (2006) and Konieczny and Skrzypacz (2004), the
empirical evidence supporting the menu cost theory is mixed, although some studies that
use high and moderate inflation period data such as Lach and Tsiddon (1996), provide
evidence consistent with it. However, some studies, e.g., Carlton (1986), report findings
of frequent small price changes which appear to go against the simple menu cost theory.
1
Two empirical studies that offer direct evidence on the relevance of menu costs
(Levy, et al. 1997, and Owen and Trzepacz, 2002) use variation in regulatory
environment in the form of item pricing laws and the resource costs necessitated by their
requirements, to demonstrate that higher price adjustment costs lead to greater price
rigidity. The current study documents variation in price rigidity between holiday and non-
holiday periods, and contributes to that literature by demonstrating the critical
importance of price adjustment costs for price rigidity. Our findings, therefore, reinforce
the likely importance of costs of price adjustment as a source of price rigidity, at least in
the retail multi-product setting.
3
This finding also complements the existing literature that studies variations in price
rigidity across dimensions such as time, markets, and products.
2
We add to this literature
by documenting an additional form of heterogeneity in price rigidity– variation in price
rigidity across holiday and non-holiday periods. This is particularly valuable because it
occurs within just a one-year period of time. As such, it offers a natural experiment
because most factors that have been traditionally proposed as explanations for price
rigidity, such as variation in industry concentration, in implicit and/or explicit contracts,
in the nature of long-term relationships, or in the market structure, do not vary within the
year between holiday to non-holiday periods.
3
The paper is organized as follows. In section I, we briefly discuss our theoretical
prediction. In section II, we describe the data. In section III we report the findings. In
section IV we discuss and rule out alternative explanations. We conclude in section V.
I. THEORETICAL PREDICTION
Our theoretical prediction is fairly straightforward. We argue that the costs of price
adjustment increase during holidays, drawing on managerial insights and the existing
studies of price adjustment costs. This observation leads to our hypothesis—that retail
prices should be more rigid during holiday periods in comparison to the rest of the year.
The initial insight about higher holiday price adjustment costs came from discussions
with retail price managers. The conversations we had with them confirm the existence of
higher costs of price adjustment during holidays. For example, Bob Venable, an expert in
the supermarket industry, stated that:
“These costs of price adjustment increase substantially during holiday periods. The limited managerial
