Mark E. Bergen

The Magnitude of Menu Costs: Direct Evidence from Large U. S. Supermarket Chains

We use store-level data to document the exact process of changing prices and to directly measure menu costs at five multi-store supermarket chains. We show that changing prices in these establishments is a complex process, requiring dozens of steps and a nontrivial amount of resources. The menu costs average

Branded Variants: A Retail Perspective

105,887/year per store, comprising 0.70% of revenues, 35.2% of net margins, and

Menu Costs, Posted Prices, and Multiproduct Retailers

0.52/price change. These menu costs may be forming a barrier to price changes. Specifically, (1) a supermarket chain facing higher menu costs (due to item pricing laws which require a separate price tag on each item) changes prices 2 1/2 times less frequently than the other four chains; (2) within this chain, the prices of products exempt from the law are changed over three times more frequently than the products subject to the law.

Understanding cooperative advertising participation rates in conventional channels

Manufacturers frequently offer myriad variations of a branded product. In many cases, manufacturers have tens to hundreds of models. Seiko wrist watches, for example, may come with different bands,...

Heterogeneity in Price Rigidity: Evidence from a Case Study Using Microlevel Data

We use a unique store-level data set to directly measure menu costs and to study the price change process at a large U.S. drugstore chain. We compare and contrast the magnitude of these measures with similar measures from 4 large U.S. supermarket chains. We find that (1) the actual magnitude of menu costs as a share of revenues, (2) menu costs per price change, (3) the frequent use of promotional pricing, and (4) the use of weekly pricing rules, are similar across both retail formats. Given that the main common features of these two types of retail formats are that (i) they both use posted prices, and (ii) both are multiproduct retailers selling a large number of products, our findings suggest that the magnitude of the menu cost components we measure, and the price change practices we document, may be generalizable across retail formats with these two features.

When Truces Collapse: A Longitudinal Study of Price-Adjustment Routines

Cooperative advertising plans feature prominently in marketing programs in conventional channels and make up the majority of marketing funds in some product categories. Available data show that coo...

Price Adjustment at Multiproduct Retailers

We combine two data sets to study price rigidity. The first consists of weekly time series of retail, wholesale, and spot prices for twelve products. These time series contain two exogenous cost shocks. We find that prices exhibit more rigidity in response to the second shock than the first. The second data set consists of all publicly available information about the shocks. Content analysis of these information reveals that the first shock is larger and more persistent, and the market has more information on it than the second. We conclude, therefore, that prices are more flexible in response to cost shocks that are larger, that are more persistent, and on which market participants have more information.

Holiday Price Rigidity and Cost of Price Adjustment

We analyze the microfoundations of the routine in a study of price-adjustment processes at a manufacturing firm. Existing theory says that truces balance cognitive and motivational differences across functions, but there is scant evidence on how truces work. We show both stability and change in routines. For minor price adjustments, routines incorporate truces in stable but separate market interpretations by the sales and marketing groups. Major price changes put truces at risk, as latent conflict over information and interests becomes overt. The ensuing battle shows how interests, information, and truces are intertwined in performing the routine. Routines are not just stable entities, but adaptive performances that include conflict. We illustrate how our approach addresses fundamental problems such as how firms perform economics, how routines incorporate economic theory, and how routines shape macroeconomic dynamics. We argue that our approach can be extended to any routine-based organizational work.

Vertical territorial restrictions and public policy: Theories and industry evidence

We empirically study the price adjustment process at multiproduct retail stores. We use a unique store level data set for five large supermarket and one drugstore chains in the U.S., to document the exact process required to change prices. Our data set allows us to study this process in great detail, describing the exact procedure, stages, and steps undertaken during the price change process. We also discuss various aspects of the microeconomic environment in which the price adjustment decisions are made, factors affecting the price adjustment decisions, and firm-level implications of price adjustment decisions. Specifically, we examine the effects of the complexity of the price change process on the stores’ pricing strategy. We also study how the steps involved in the price change process, combined with the laws governing the retail price setting and adjustment, along with the competitive market structure of the retail grocery industry, influence the frequency of price changes. We also examine how the mistakes that occur in the price change process influence the actions taken by these multiproduct retailers. In particular, we study how these mistakes can make the stores vulnerable to civil law suits and penalties, and also damage their reputation. We also show how the mistakes can lead to stock outs or unwanted inventory accumulations. Finally, we discuss how retail stores try to minimize these negative effects of the price change mistakes.

Price Points And Price Rigidity

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 nonholiday 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.