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Managerial And Customer Costs Of Price Adjustment:

MANAGERIAL AND CUSTOMER COSTS OF PRICE ADJUSTMENT:
DIRECT EVIDENCE FROM INDUSTRIAL MARKETS
Mark J. Zbaracki, Mark Ritson, Daniel Levy, Shantanu Dutta, and Mark Bergen*
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.
I have no answer to the question of how to measure these menu change
costs, but these [menu cost] theories will never be taken seriously until
an answer is provided. Edward Prescott (1987, p. 113)
Given the large number of theoretical papers that evaluate the implications
of [price] adjustment costs, obtaining direct evidence that such
costs are present seems crucial. Margaret Slade (1998, p. 104)
I. Introduction
ONE of the popular theories of price rigidity is the
cost-of-price-adjustment theory (Akerlof & Yellen,
1985; Mankiw, 1985). According to this theory, a seller
must incur a fixed menu cost each time a price is changed,
and therefore a seller is likely to make fewer price changes
when...