asymmetry in retail wholesale and shipping point pricing for fresh vegetables the linkage among retail wholesale and shipping point prices for a select group of fresh vegetables is measured using wolffram s asymmetry model procedures for dealing with discontinuous time series are shown and granger s causality test is used to show the direction of the price linkage wholesale prices are shown to lead both retail and shipping point prices asymmetry in the retail wholesale response indicates that wholesale price decreases are reflected at the retail more so than are wholesale price increases wholesale price decreases are more fully passed through to the shipping point relative to wholesale increases

a friction model for describing and forecasting price changes this paper presents a new friction model for describing the price changes of a product or brand over time and for forecasting both the timing and magnitude of such changes from one period to the next after a review of the related pricing literature we present our model and a modified controlled random search procedure for estimating its parameters the model is applied to describe and forecast the weekly mortgage interest rates for a local bank in the philadelphia area finally limitations and several potential applications of this methodology are discussed

manufacturer allowances and retailer pass through rates in a competitive environment a commonly held belief has grocery and mass merchandise retailers gaining power relative to the upstream consumer package goods manufacturers one of the major justifications for this belief is that manufacturers are now giving retailers more side payments such as trade allowances slotting allowances etc however a number of researchers have shown that these concessions have not translated into increased profit for the retailer relative to the manufacturer this paper explores via an analytic model why one might see retailers getting concessions from the manufacturer without being able to translate them into high profits we do this by representing the interaction between the channel members as a one period profit maximizing game where manufacturers decide on how large a side payment i e a concession to give to each retailer and retailers decide on how much of this side payment to use to promote the manufacturer s product at the heart of our model is a demand function for each product offering i e a specific brand sold by a specific retailer this demand function is linear in own and other s prices but based on empirical evidence is assumed to be nonlinear in the effects of merchandising activities e g short term price discounts better shelf space advertising etc specifically merchandising effects are modeled with a square root function that also acknowledges most short term promotional effects result in brand or store switching versus increase category volume the model is composed of six parameters these are the inherent popularity of the brand at a particular outlet own price sensitivity cross but within the store price sensitivity customer s sensitivity to within store promotion activities customer s sensitivity to between store promotional activities and the degree to which promotional activities yield incremental product category sales we use our underlying demand formulation to find the equilibrium solution to the full information stackelberg leader game for different store and brand loyalty environments as captured by our six parameters these parameters are chosen based on empirical evidence to span possible market conditions that each channel member might have our findings and modeling efforts should be of interest to analytic channel modelers and scholars interested in the mass merchandising and grocery store industries for a theoretical point of view we build upon the case 4 model of lee and staelin 1997 to allow for promotional activities from a substantive point of view we show that manufacturers will freely give retailers side payments even though they know these retailers will pocket a substantial portion of this concession moreover we identify conditions within our model that lead to larger allowances lower pass through rates and lower retail profits outcomes that are compatible with recent industry trends in addition we highlight the difference in effect on profits prices etc of changes in consumers sensitivity to inter store differences in storewide merchandising activities one of the more counter intuitive results of these analyses is that it is in the manufacturer s best interest to help retailers increase their spatial monopoly by decreasing consumers tendency to cross store shop because of merchandising activities

rockets and feathers the asymmetric speed of adjustment of uk retail gasoline prices to cost changes abstract the paper develops a quadratic quantity adjustment model to test the hypothesis put forward in the recent monopolies and mergers commission report that the speed of adjustment of uk retail gasoline prices to cost changes is more rapid when costs rise than when they fall and that the adjustment path is more concentrated around the mean value on the upswing using data from 1982 to 1989 evidence of faster and more concentrated responses to cost increases were found

does bait and switch really benefit consumers while the field of marketing science has long been interested in the effects of promotional efforts public policy issues involving illegal marketer fraud and deception have generally not been addressed in this body of work one key exception to this generalization is a marketing science article suggesting that the practice of bait and switch may be beneficial to consumers and furthermore that the federal trade commission should investigate revising its standards to legitimize this practice gerstner and hess 1990 this finding and recommendation seemed so significant that it is surprising that the recommendation has not to date been explored in greater detail in this paper we further explore the impact of the two components of bait and switch out of stock and upselling we do this by using moorthy s 1993 theoretical modeling framework to systematically extend and assess the gerstner and hess model we find that the previously reported increase in consumer welfare that arises from allowing out of stock conditions at retailers is actually due to the utility created by salespersons explaining product features and benefits not by the out of stock thus the ramifications of both our legal and modeling analyses are that deceptive bait and switch practices result in harm to consumers and should not be legalized our paper concludes by proposing worthwhile modeling issues for further exploration in addition we suggest that our procedure for analyzing public policy issues by exploring the confluence of law consumer behavior and marketing models can serve as a useful exemplar for further contributions to public policy by marketing scientists

income and the utilization of long term care services evidence from the social security benefit notch this paper estimates the impact of income on the long term care utilization of elderly americans using a natural experiment that led otherwise similar retirees to receive significantly different social security payments based on their year of birth using data from the 1993 and 1995 waves of the ahead we estimate instrumental variables models and find that a positive permanent income shock lowers nursing home use but increases the utilization of paid home care services we find some suggestive evidence that the effects are due to substitution of home care for nursing home utilization the magnitude of these estimates suggests that moderate reductions in post retirement income would significantly alter long term utilization patterns among elderly individuals

managing channel profits a channel of distribution consists of different channel members each having his own decision variables however each channel member s decisions do affect the other channel members profits and as a consequence actions a lack of coordination of these decisions can lead to undesirable consequences for example in the simple manufacturer retailer consumer channel uncoordinated and independent channel members decisions over margins result in a higher price paid by the consumer than if those decisions were coordinated in addition the ensuing suboptimal volume leads to lower profits for both the manufacturer and the retailer this paper explores the problems inherent in channel coordination we address the following questions what is the effect of channel coordination what causes a lack of coordination in the channel how difficult is it to achieve channel coordination what mechanisms exist which can achieve channel coordination what are the strengths and weaknesses of these mechanism what is the role of nonprice variables e g manufacturer advertising retailer shelf space in coordination does the lack of coordination affect normative implications from in store experimentation can quantity discounts be a coordination mechanism are some marketing practices actually disguised quantity discounts we review the literature and present a simple formulation illustrating the roots of the coordination problem we then derive the form of the quantity discount schedule that results in optimum channel profits this article was originally published in marketing science volume 2 issue 3 pages 239 272 in 1983

can bait and switch benefit consumers we present a model that leads to an equilibrium with characteristics similar to the following stylized facts observed in retail markets a retailers advertise only selected brands b often low priced advertised brands are understocked c in store promotions are biased towards more expensive substitute brands together these practices constitute illegal bait and switch is this phenomenon necessarily harmful to consumers and to the economy we show that bait and switch can benefit consumers because utility is created through in store promotions and price competition is enhanced this suggests that the ftc investigate further its ban on bait and switch

asymmetric wholesale pricing theory and evidence asymmetric pricing or asymmetric price adjustment is the phenomenon where prices rise more readily than they fall we offer and provide empirical support for a new theory of asymmetric pricing in wholesale prices wholesale prices may adjust asymmetrically in the small but symmetrically in the large when retailers face cost of price adjustment such retailers will not adjust prices for small changes in their costs manufacturers then see a region of inelastic demand where small wholesale price changes do not translate into commensurate retail price changes the implication is asymmetrica small wholesale price increase is more profitable because manufacturers will not lose customers from higher retail prices yet a small decrease is less profitable because it will not lower retail prices hence there is no extra revenue from greater sales for larger changes this asymmetry in the behavior of wholesale price vanishes as the price adjustment cost is compensated by the increase in retailers revenue resulting from correspondingly large retail price changes we present a formal economic model of a channel with forward looking retailers and cost of price adjustment test the derived propositions on the behavior of manufacturer prices using a large supermarket scanner data set and find that the results are consistent with the predictions of our theory we then discuss the implications for asymmetric pricing channels and cost of price adjustment literatures as well as public policy

market structure and the nature of price rigidity evidence from the market for consumer deposits panel data on consumer bank deposit interest rates reveal asymmetric impacts of market concentration on the dynamic adjustment of prices to shocks banks in concentrated markets are slower to raise interest rates on deposits in response to rising market interest rates but are faster to reduce them in response to declining market interest rates thus banks with market power skim off surplus on movements in both directions since deposit interest rates are inversely related to the price charged by banks for deposits the results suggest that downward price rigidity and upward price flexibility are a consequence of market concentration

strategic decentralization in channels the purpose of this paper is to understand the effect of strategic interaction on a manufacturer s channel structure decision in the model i analyze if there were no strategic interaction then the manufacturer would prefer vertical integration to decentralization with strategic interaction however decentralization can be a nash equilibrium strategy as mcguire and staein mcguire timothy richard staelin 1983a an industry equilibrium analysis of downstream vertical integration marketing sci 2spring 161 192 showed so the question arises what is it about strategic interaction that makes decentralization a nash equilibrium strategy the answer i give is that strategic interaction makes it possible for a manufacturer s retail demand curve to rise when he decentralizes i show that this raising of the demand curve on decentralization can happen only if one of the following mutually exclusive conditions is satisfied 1 the manufacturers products are demand substitutes at the retail level and strategic complements at the manufacturer or retailer levels 2 the manufacturer s products are demand complements at the retail level and strategic substitutes at the manufacturer or retailer levels strategic complementarity at the retailer manufacturer level means that if one retailer manufacturer raises his price then the other retailer manufacturer would raise his price as well strategic substitutability is just the opposite these results show that what is important for decentralization to occur is not how demand substitutable the two manufacturers products are as one might have thought from earlier works in the literature but rather the nature of coupling between demand dependence and strategic dependence

coordinating channels under price and nonprice competition this paper analyzes how manufacturers should coordinate distribution channels when retailers compete in price as well as important nonprice factors such as the provision of product information free repair faster check out or after sales service differentiation among retailers in price and nonprice service factors is a central feature of markets ranging from automobiles and appliances to gasoline and is especially observed in the coexistence of high service retailers and lower price discount retailers therefore how a manufacturer should manage retail differentiation is an important channel management question yet the approach in the existing literature has been to examine channel coordination under the standard symmetric contracting assumption that offering a uniform contract to all the retailers in a market will be sufficient for coordination i bring this assumption into question and ask when is it optimal for the manufacturer to use the channel contract to deliberately induce retail differentiation even if the retailers were ex ante identical in their cost and other characteristics the paper identifies the type of channel contracts that can endogenously induce symmetry as opposed to differentiation among retailers next the paper highlights a type of channel conflict that arises from the very nature of retail price service competition a manufacturer might find the retailers to be excessively biased towards price competition at the cost of service provision or vice versa the paper establishes when a manufacturer is likely to stimulate greater price as opposed to greater service competition among the retailers the framework that i develop to address these issues highlights the role of two basic types of consumer heterogeneity consumers are heterogeneous in their locations as in the spatial models of horizontal differentiation and in their willingness to pay for retail services as in the models of vertical differentiation the model also uses a natural relationship in retail markets between the travel time cost incurred by a consumer and her willingness to pay the more affluent consumers who have a higher willingness to pay for retail services also have a higher cost for their personal time given these market features the paper analyzes the problem faced by a manufacturer who sells to competing retailers the paper shows that the standard notion in the literature of offering similar contracts to all the retailers is sufficient only in markets with substantial locational differentiation relative to the differences in the willingness to pay effective channel management in these markets simply requires mechanisms that ensure that retailer interests are aligned so that they compete by offering a mix of price and service that is desirable from the manufacturer s point of view however in markets with small locational differentiation and substantial diversity in consumer willingness to pay the manufacturer s problem is not just to align retailer interests but to also use the channel contract to induce the correct level of retail differentiation this helps the manufacturer to better cater to the diversity in consumer willingness to pay and to prevent the cut throat competition that the retailers would otherwise have indulged in the manufacturer can achieve this through the use of menu based contracts menu based contracts induce differentiated retailer behavior despite the fact that the retailers are not forced into accepting different terms of trade this aspect can be useful in shielding manufacturers from litigation under the robinson patman act the paper also shows that for relatively high ticket items retailers tend to be excessively biased towards competing in the provision of retail services the correlation between consumer willingness to pay for service and travel costs implies that for high ticket products the competing retailers will focus on the more service sensitive customers at the cost of ignoring the price sensitive consumers in the market the manufacturer is therefore likely to encourage greater price competition among the retailers in contrast for low ticket items the manufacturer prefers to reduce price competition and encourage greater provision of services this provides an endogenous rationale for the use of price ceilings versus floors the basic model is also extended to consider the effect of upstream competition between manufacturers under upstream competition coordinating retail price and service decisions is not always optimal for an individual manufacturer this extension to manufacturer competition provides a basis for understanding the role of retail price service differentiation in the context of a channel duopoly it also shows that a mixed distribution channel a channel in which one manufacturer chooses to be coordinated while the other chooses to be noncoordinated can be an equilibrium in markets with weak brand loyalty

let me talk to my manager haggling in a competitive environment although negotiating over prices with sellers is common in many markets such as automobiles furniture services consumer electronics etc it is not clear how a haggling price policy can help a firm gain a strategic advantage or whether it is even sustainable in a competitive market in this paper we explore the implications of haggling and fixed prices as pricing policies in a competitive market we develop a model in which two competing retailers choose between offering either a fixed price or haggling over prices with customers there are two consumer segments in our analysis one segment thehagglers has a lower opportunity cost of time and a lower haggling cost than the other segment thenonhagglers when both retailers follow the same pricing policy then a haggling policy is more profitable than a fixed price policy only when the proportion of nonhagglers is sufficiently high we find two kinds of prisoners dilemma under some conditions a more profitable haggling policy can be broken by a fixed price policy and under other conditions a fixed price policy can be broken by a haggling policy surprisingly we show that under some conditions an asymmetric outcome with one retailer haggling and the other offering a fixed price is also an equilibrium

prices rise faster than they fall output prices tend to respond faster to input increases than to decreases this tendency is found in more than two of every three markets examined it is found as frequently in producer goods markets as in consumer goods markets in both kinds of markets the asymmetric response to cost shocks is substantial and durable on average the immediate response to a positive cost shock is at least twice the response to a negative shock and that difference is sustained for at least five to eight months unlike past studies which documented similar asymmetries in selected markets gasoline agricultural products etc this one uses large samples of diverse products 77 consumer and 165 producer goods accordingly the results suggest a gap in an essential part of economic theory as a start on filling this gap the study finds no asymmetry in the resonse of an individual decision maker a supermarket chain to its costs but it finds above average asymmetry where a cost shock is filtered through a fragmented w

manufacturer retailer channel interactions and implications for channel power an empirical investigation of pricing in a local market the issue of power in the marketing channels for consumer products has received considerable attention in both academic and practitioner journals as well as in the popular press our objective in this paper is to provide an empirical method to measure the power of channel members and to understand the reasons demand factors cost factors nature of channel interactions for this power we confine our analysis to pricing power in channels we use methods from the game theory literature in marketing on channel interactions to obtain the theoretical framework for our empirical model this literature provides us a definition of power one that is based on the proportion or percentage of channel profits that accrue to each of the channel members there can be a variety of possible channel interactions between manufacturers and retailers in channels the theoretical literature has examined some of these games for example choi 1991 examines how channel profits for manufacturers and retailer vary if channel interactions are either vertical nash or if they are stackelberg leaderfollower with either the manufacturer or the retailer being the price leader each of these three channel interaction games has different implications for profits made by manufacturers and retailers and consequently for the relative power of the channel members in contrast to the previous literature that has focused largely on the above three channel interaction games our model extends the game theoretic literature by allowing for a continuum of possible channel interactions between manufacturers and a retailer furthermore for a given product market we empirically estimate from the data where the channel interactions lie in this continuum more critically we obtain measures of how channel profits are divided between manufacturers and the retailer in the product market where a higher share of channel profit is associated with higher channel power we then examine how channel power is related to demand conditions facing various brands and cost parameters of various manufacturers in going from game theory based theoretical models of channel interactions to empirical estimation we use the new empirical industrial organization framework bresnahan 1988 as part of this structural modeling framework we build retail level demand functions for the various brands manufacturer and private label in a given product category given these demand functions we obtain optimal pricing rules for manufacturers and the retailer in determining their optimal prices manufacturers and the retailer account for how all the players in the channel choose their optimal prices that is we account for dependencies in decision making across channel members these dependencies are characterized by a set of conduct parameters which are estimated from market data the conduct parameters enable us to identify the nature of channel interactions between manufacturers and the retailer along the continuum mentioned previously in addition to the demand and conduct parameters manufacturers marginal costs are also estimated in the model these marginal cost estimates along with the manufacturer prices and retail prices available in our dataset enable us to compute the division of channel profits among the channel members hence we are able to obtain insights into who has pricing power in the channel in the empirical application of the model we analyze a local market for two product categories refrigerated juice and tuna in both categories there are three major brands the difference between them is that the private label has an insignificant market share in the tuna category our main empirical results show that the usual games examined in the marketing literature do not hold for the given data we also nd that the retailer s market power is very significant in both these product categories and that the estimated demand and cost parameters are consistent with the estimated pattern of conduct between the manufacturers and the retailer given the evidence from the trade press of intense manufacturer competition in these categories as well as the commodity nature of these products the result of retailer power appears intuitive

search with learning from prices does increased inflationary uncertainty lead to higher markups aggregate cost uncertainty arising from real shocks or unanticipated inflation reduces the informativeness of prices by scrambling relative and aggregate variations but when agents can acquire additional information such increased noise may in fact lead them to become better informed and price competition will intensify we examine these issues in a model of search with learning where consumers search optimally from an unknown price distribution while firms price optimally given consumers search rules we show that the decisive factor in whether inflation variability increases or reduces the incentive to search and thereby market efficiency is the size of informational costs

dynamic pricing in retail gasoline markets supergame models of tacit collusion show that supportable price cost margins increase with expected future collusive profits ceteris paribus as a result collusive margins will be larger when demand is expected to increase or marginal costs are expected to decline using panel data on sales volume and gasoline prices in 43 cities over 72 months we find behavior consistent with tacit collusion in retail gasoline markets controlling for current demand and cost current margins increase with expected next month demand and decrease with expected next month cost the results are not consistent with intertemporal l inkages due to inventory behavior or customer loyalty

poverty political freedom and the roots of terrorism this article provides an empirical investigation of the determinants of terrorism at the country level in contrast with the previous literature on this subject which focuses on transnational terrorism only i use a new measure of terrorism that encompasses both domestic and transnational terrorism in line with the results of some recent studies this article shows that terrorist risk is not significantly higher for poorer countries once the effects of other country specific characteristics such as the level of political freedom are taken into account political freedom is shown to explain terrorism but it does so in a non monotonic way countries in some intermediate range of political freedom are shown to be more prone to terrorism than countries with high levels of political freedom or countries with highly authoritarian regimes this result suggests that as experienced recently in iraq and previously in spain and russia transitions from an authoritarian regime to a democracy may be accompanied by temporary increases in terrorism finally the results suggest that geographic factors are important to sustain terrorist activities this abstract was borrowed from another version of this item

measuring market power in the ready to eat cereal industry the ready to eat cereal industry is characterized by high concentration high price cost margins large advertising to sales ratios and numerous introductions of new products previous researchers have concluded that the ready to eat cereal industry is a classic example of an industry with nearly collusive pricing behavior and intense nonprice competition this paper empirically examines this conclusion in particular i estimate price cost margins but more importantly i am able empirically to separate these margins into three sources i that which is due to product differentiation ii that which is due to multi product firm pricing and iii that due to potential price collusion the results suggest that given the demand for different brands of cereal the first two effects explain most of the observed price cost margins i conclude that prices in the industry are consistent with noncollusive pricing behavior despite the high price cost margins leading firms are able to maintain a portfolio of differentiated products and influence the perceived product quality it is these two factors that lead to high price cost margins

menu costs posted prices and multiproduct retailers 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 four 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

sticky prices new evidence from retail catalogs this paper presents new results on the size frequency and synchronization of price changes for twelve selected retail goods over the past 35 years three basic facts about the data are uncovered first nominal prices are typically fixed for more than one year although the time between changes is very irregular second prices change more often during periods of high overall inflation third when prices do change the sizes of the changes are widely dispersed both large and small changes occur for the same item and the sizes of these changes do not closely depend on overall inflation

channel coordination when retailers compete this paper explores channel coordination by a manufacturer that sells through competing retailers and that treats these retailers equally as required by the robinson patman act the authors show that in general there exists no single two part tariff with a constant per unit charge that will duplicate the behavioral results i e prices quantities and channel profits that are obtained by a vertically integrated system that is the channel cannot be coordinated except in the trivial cases of identical or noncompeting retailers however an appropriately specified quantity discount schedule will enable the channel to earn the same profits generated by a vertically integrated system conditions are derived under which a manufacturer will prefer to offer various two part tariffs with constant per unit charges instead of the channel coordinating quantity discount schedule the authors also establish the existence of a menu of two part tariffs that mimics all results of a vertically integrated system however only under stringent conditions will retailers select the appropriate tariff from the menu when these conditions are not satisfied the channel is worse off than in the case of a single second best tariff it is also demonstrated that under a wide range of parametric values the manufacturer will prefer to offer the second best two part tariff rather than a menu of two part tariffs that could maximize channel profits

inflation fixed cost of price adjustment and measurement of relative price variability theory and evidence in an interesting paper julio rotemberg 1983 extends the works of eitan sheshinski and yoram weiss 1977 and michael mussa 1981 to examine the aggregate consequences of monetary growth in an economy in which sellers incur a fixed cost of price adjustment the fixed cost prevents a continual adjustment of individual prices so each seller keeps his price constant in periods of discrete length increasing his price in discrete jumps at the end of these periods a central feature of the inflationary process is therefore that relative prices become dispersed around their means and the theory predicts that even a fully anticipated inflation increases the variability of relative prices the empirical evidence on this point does however appear to be mixed on the one hand richard parks 1978 and stanley fischer 1981a b 1982 conclude that anticipated inflation does increase relative price variability which fischer interprets as providing empirical support for the theory on the other hand mario blejer 1981 1983 and blejer and leonardo leiderman 1982 find that anticipated inflation has no effect or only a very weak effect on relative price variability which makes john taylor 1981 doubt the quantitative significance of the theory 2 this paper uses rotemberg s theoretical framework to demonstrate that the proxy for relative price variability adopted in the empirical literature does not properly capture the relative price variability that is caused by a fixed cost of price adjustment the methodology of the above cited studies is therefore not appropriate for evaluating the empirical relevance of the fixed cost theory and the divergence of their results is not surprising specifically the proxy which consists of the variance of the rates of price change between successive observations does not always increase with the anticipated inflation even with disaggregate data 3 the proxy decreases with the anticipated inflation in approximately half of any interval of inflation rates for which a seller adjusts his price no more than a given number of times between successive observations moreover the relationship between the anticipated inflation and the proxy depends on such extraneous factors as the timing of the observations a change in the timing may change a positive relationship between the anticipated inflation and the proxy to a negative one and vice versa the paper also proposes alternative more satisfactory measures of relative price variability and provides empirical support for the theoretical conclusions

optimal pricing with costly adjustment evidence from retail grocery prices in many theoretical models it is assumed that there are costs associated with adjusting prices in this paper the existence type and magnitude of such costs are investigated empirically a discrete choice dynamic programming model that nests fixed and variable costs is developed and econometric estimates of the adjustment cost function are obtained the data used to implement the model consist of weekly retail prices and sales of three brands of saltine crackers sold by four chains of grocery stores in a small u s town the study has several distinguishing characteristics first the data are highly disaggregate at the level of brand and store second variables are sampled at weekly intervals third the model nests fixed and variable adjustment costs and can therefore determine their relative importance finally the discrete choice model is both structural and dynamic

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 multistore 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 105 887 year per store comprising 0 70 percent of revenues 35 2 percent of net margins and 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 that require a separate price tag on each item changes prices two and one half 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 in principle fixed costs of changing prices can be observed and measured in practice such costs take disparate forms in different firms and we have no data on their magnitude so the theory can be tested at best indirectly at worst not at all alan blinder 1991 p 90

relative price changes as aggregate supply shocks this paper proposes a theory of supply shocks or shifts in the short run phillips curve based on relative price changes and frictions in nominal price adjustment when price adjustment is costly firms adjust to large shocks but not to small shocks and so large shocks have disproportionate effects on the price level therefore aggregate inflation depends on the distribution of relative price changes inflation rises when the distribution is skewed to the right and falls when the distribution is skewed to the left we show that this theoretical result explains a large fraction of movements in postwar u s inflation moreover our model suggests measures of supply shocks that perform better than traditional measures such as the relative prices of food and energy

intermediate goods and business cycles implications for productivity and welfare this paper presents an aggregate demand driven model of business cycles that provides a new explanation for the procyclicality of productivity and simultaneously predicts large welfare losses from monetary nonneutrality the key features of the model are an input output production structure imperfect competition countercyclical markups and for some results state dependent price rigidity true technical efficiency is procyclical even though production takes place with constant returns without technology shocks or technological externalities the paper has observable implications that distinguish it empirically from related work these implications are generally supported by data from u s manufacturing industries copyright 1995 by american economic association

the impact of reference price effects on the profitability of price promotions this paper investigates the impact of reference price effects on retailer price promotions and describes why these effects can make promoting profitable first we analyze the profit impact of reference price effects generated by a single period of promotion the promotion can increase profit if the gain that these effects create in the promotion period outweighs the loss they create in future periods we then describe how retailers can estimate the optimal strategy of recurring promotions that maximizes profits from reference price effects over a time horizon examples of such strategies are presented for a retailer selling a national brand of peanut butter we obtain insights into how promotion prices timing and profits are affected by changes in costs interest rates consumers reactions to reference price effects and error in estimates used in the model the retailer s optimal reaction to a trade deal is also examined this strategy involves a phase of increased promotion activity sandwiched between phases of decreased activity we explain these results using the effects described in the single period model

loss leader pricing and rain check policy loss leader pricing and rain check policies are common in retail markets yet research on these topics is surprisingly scarce in this paper we study the effects of leader pricing and rain check policy on stores profits and market outcomes suppose stores can accurately predict demand might they still run out of stock we investigate whether such a result is plausible when stores can offer rain checks the paper also helps resolve an issue that has recently attracted much attention should the ftc repeal its rule prohibiting stock outs of advertised sale items

price discrimination through a distribution channel theory and evidence price discrimination practices are common but they typically are analyzed in a framework in which firms sell directly to end users louis phlips 1981 richard schmalensee 1981 hal varian 1985 gerstner and holthausen 1986 this direct channel framework is valid for service industries such as entertainment and travel where senior citizens buy reduced price tickets to musical concerts and children receive discounts on airfares and movietheater tickets in the packaged goods and durable goods industries however manufacturers sell to retailers who sell to consumers in indirect channels like these price discrimination occurs when manufacturers target pull discounts1 to price conscious consumers in the form of coupons and rebates consumers who do not use these discounts pay higher net prices because manufacturers cannot dictate consumer prices to retailers analysis of price discrimination ought to take into account the pricing behavior of retailers michael katz 1987 gerstner and hess 1991 while some researchers have studied coupons as a means for price discrimination william levedahl 1984 chakravarthi narasimhan 1984 they have done so in a direct channel context and have ignored the role of retailers or other middlemen in the pricing and couponing process in this paper we study price discrimination within a channel of distribution consisting of a single manufacturer and competitive retailers in the model the manufacturer pricediscriminates using a pull discount targeted at consumers with low reservation prices to reduce the net price these consumers pay for the product some consumers with higher reservation prices who self select not to use the discount pay the full retail price for the product the manufacturer chooses the wholesale price for the firm s product and the size of the price discriminating pull discount taking as given the markup percentage used by retailers joint determination of the manufacturer discount and retail markup is also considered the paper s major finding is that a higher retail markup percentage influences the manufacturer to use price discrimination in a less intensive way i e to reduce the size of the equilibrium pull discount as well as the wholesale price the intuition behind this result is as follows the greater the retail markup percentage for a given wholesale price the greater will be the retail price the greater the retail price the larger the pull discount will have to be to keep the low reservation price consumers in the market but the manufacturer bears the entire cost of the discount and a larger discount induces more nontargeted customers to use it these two effects make price discrimination less profitable when markup percentage increases so the manufacturer reduces its pull discount and in gerstner graduate school of management university of california davis ca 95616 and department of economics haifa university haifa 31999 israel hess department of business administration university of illinois champaign il 61820 holthausen department of economics north carolina state university box 7507 raleigh nc 27695 we thank alastair hall jeongwen chiang randy cooke and nick ruotolo for their comments and assistance 1manufacturers who distribute products through retailers use push or pull techniques to increase sales under push manufacturers offer inducements to retailers when consumers shop for the product the retailer has an incentive to promote the brand thus pushing it through to consumers under pull manufacturers offer incentives such as coupons or rebates directly to consumers the manufacturers hope that demand will be pulled through the channel by consumers asking retailers for the promoted brand

determinants of store level price elasticity using weekly scanner data representing 18 product categories the authors estimated store specific price elasticities for a chain of 83 supermarkets they related these price sensitivities to a com

the rigidity of prices this paper uses evidence on individual transaction prices to analyze price behavior the evidence shows that for many transactions pricesremain rigid for periods exceeding one year the rigidity of price ispositively correlated with industry concentration for several productsthe correlation of price changes across buyers is low the paper alsoinvestigates the relationship between price rigidity price change andthe length of time a buyer and seller have been doing business together the author interprets the evidence as emphasizing the importance of nonprice rationing and the inadequacy of models in whichprice movements alone clear markets copyright 1986 by american economic association

heterogeneity in price rigidity evidence from a case study using microlevel data 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

price flexibility in channels of distribution evidence from scanner data in this study we empirically examine the extent of price rigidity using a unique store level time series data set consisting of i actual retail transaction prices ii actual wholesale transaction prices which represent both the retailers costs and the prices received by manufacturers and iii a measure of manufacturers costs for 12 goods in two widely used consumer product categories we simultaneously examine the extent of price rigidity for each of the 12 products at both final goods and intermediate goods levels we study two notions of price rigidity employed in the existing literature i the frequency of price changes and ii the response of prices to exogenous cost changes we find that retail prices exhibit remarkable flexibility in terms of both notions of price rigidity i e they change frequently and they seem to respond quickly and fully to cost changes furthermore we find that retail prices respond not just to their direct costs but also to the upstream manufacturers costs which further reinforces the extent of the retail price flexibility at the intermediate goods level of the market in contrast we find relatively more evidence of rigidity in the response of manufacturers prices to cost changes this despite the fact that wholesale prices change frequently and therefore exhibit flexibility according to the first notion of price rigidity

what is new keynesian economics this research was supported by the national science foundation i am grateful to george williams for help with the data and to steven allen laurence ball olivier j blanchard timothy bresnahan charles calomiris dennis carlton robert chirinko russell cooper stanley fischer herschel grossman r glenn hubbard david laidler john leahy assar lindbeck n gregory mankiw david romer julio rotemberg dennis snower john taylor andrew weiss and two anonymous referees for comments on one or more earlier drafts i am also indebted to michael parkin and edmund s phelps for helping to establish the etymology of the phrase new keynesian

pricing and promotions in asymmetric duopolies this paper develops a modeling framework for making promotions decisions in contrast to some of the prior research the framework explicitly models promotions its central feature is the view of promotions competition as a multistage game in which regular prices are chosen first followed by the choice of promotion depths and frequencies it is used to illustrate the nature of competition between a national brand and private label in equilibrium the national brand promotes to ensure that the private label does not try to attract consumers away from the national brand moreover the private label does not promote this equilibrium is also contrasted with varian s framework used by other researchers in which mixed strategy equilibrium prices are interpreted as promotions

small menu costs and large business cycles a macroeconomic model of monopoly i introduction the conflict between modern neoclassical and traditional keynesian theories of the business cycle centers upon the pricing mechanism in neoclassical models prices are fully flexible they represent the continuous optimization of economic agents and the continuous intersection of supply and demand in keynesian models prices are often assumed to be sticky they do not necessarily equilibrate all markets at all times one of the reasons for the resurgence of the equilibrium approach to macroeconomics has been the absence of a theoretical underpinning for this keynesian price stickiness this note shows that sticky prices can be both privately efficient and socially inefficient the business cycle results from the suboptimal adjustment of prices in response to a demand shock to the extent that policy can stabilize aggregate demand it can mitigate the social loss due to this suboptimal adjustment in some keynesian models prices are simply exogenously fixed 2 in others agents must set their prices in advance of the transaction date the act of altering a posted price is certainly costly these costs include such items as printing new catalogs and informing salesmen of the new price yet these menu costs are small and therefore generally perceived as providing only a weak foundation for these fixed price models however this inference is flawed small menu costs can cause large welfare losses the claim that price adjustment costs are small does not rebut the claim that they are central to understanding economic fluctuations

an empirical investigation of returns to search using data on search and choice behavior from a local automobile market we estimate monetary returns to search in terms of lower prices resulting from additional time invested in price search for our analytical framework we adapt a model developed in the job search literature to the problem of consumer search this framework is especially useful for illuminating the relationship between time spent searching the outcome of search and demand and supply side variables our results indicate that for this particular sample of buyers marginal returns to search are broadly consistent with what one might expect if consumers balance costs and benefits of search and that potential gains from additional search for lower car prices do not appear to be large for most consumers our study highlights many of the methodological difficulties involved in estimating returns to search including isolating returns to different outcomes of search and sensitivity of results to model specification and sampling error we deal with these problems by trying to isolate time spent searching for price from other uses of search time by deriving our model used in estimation from a specific conceptual framework and by extensive specification testing

asymmetric reference price effects and dynamic pricing policies we consider a group of frequently purchased consumer brands which are partial substitutes and examine two situations the first where the group of brands is managed by a retailer and second where the brands compete in an oligopoly we assume that demand is a function of actual prices and reference prices and develop optimal dynamic pricing policies for each situation in addition to researchers studying pricing strategy our results may interest retailers choosing between hi lo pricing and an everyday low price and manufacturers assessing whether to follow procter gamble s lead and replace a policy of funding consumer price reductions through trade deals with a constant wholesale price a reference price is an anchoring level formed by customers based on the pricing environment the literature suggests that demand for a brand depends not only on the brand price but also whether the brand price is greater than the reference price a perceived loss or is less than it a perceived gain the responses to gains and losses are asymmetric broadly speaking we find that when enough consumers weigh gains more than losses the optimal pricing policy is cyclical likewise when they weigh losses more than gains a constant price is optimal thus we provide a rationale for dynamic pricing which is quite distinct from the three explanations previously offered 1 decreasing unit variable costs due to learning effects 2 the transfer of inventory to consumers who face lower inventory holding costs than do retailers and 3 competitive effects our explanations apply even when the other explanations do not i e in mature product categories where learning effects are minimal when retailer inventories are minimized through the use of just in time policies and when competitive effects do not exist as in a monopoly greenleaf 1995 has shown numerically that in the presence of reference price effects the optimal pricing policy for a monopolist can be cyclical we first analytically extend greenleaf s result to a monopolist with a constant cost of goods facing a homogeneous market where all customers either weigh gains more than losses or vice versa using this building block we examine a monopolist retailer managing multiple brands we assume that demand is a linear function of prices of multiple brands and together with an expression which reflects the reference price effect further we assume that the retailer maximizes average profit per period next we analyze a duopoly and extend the results to an oligopoly we assume that the manufacturers are able to set the retail prices as in an integrated channel here we retain the same demand function as for the retailer and derive markov perfect nash equilibria we use two alternative processes of reference price formation the exponential smoothed es past price process which is frequently used in the literature and for the multi brand situations the recently proposed reference brand rb process hardie johnson and fader 1993 in the latter the reference price is the current price of the last brand bought the reference brand we adapt the individual level rb formulation in hardie et al to an aggregate demand specification for the es process we obtain most results analytically for the rb process we use simulation finally we extend our results to a population with two customer segments segment 1 which weighs gains more than losses and segment 2 which does the opposite i e is loss averse when the market consists exclusively of segment 1 customers and es is the reference price process we find that prices are cyclical in all cases analyzed i e for a monopoly a monopolist retailer managing multiple brands a duopoly and an oligopoly if the rb formulation is the underlying process a monopolist retailer managing two brands uses cyclical prices but in a duopoly the equilibrium solution is for the brands to maintain constant prices when all customers belong to segment 2 i e they are loss averse constant prices are optimal in all cases for both reference price formulations when the population consists of both segment 1 and segment 2 and the es process applies we develop a sufficient condition for cyclical pricing policies to be optimal the condition is expressed in terms of the proportion of the two segment sizes the absolute difference between the gain and loss parameters of each segment and their respective exponential smoothing constants interestingly for reasonable values of the latter two factors cyclical policies are optimal even when the proportion of segment 1 is quite small similar magnitudes are obtained numerically for the rb case

do gasoline prices respond asymmetrically to crude oil price changes the authors test and confirm that retail gasoline prices respond more quickly to increases than to decreases in crude oil prices among the possible sources of this asymmetry are production inventory adjustment lags and market power of some sellers by analyzing price transmission at different points in the distribution chain the authors attempt to shed light on these theories spot prices for generic gasoline show asymmetry in responding to crude oil price changes which may reflect inventory adjustment effects asymmetry also appears in the response of retail prices to wholesale price changes possibly indicating short run market power among retailers