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

The review of economics and statistics, 2004-05, Vol.86 (2), p.514-533 [Peer Reviewed Journal]

Distributed under a Creative Commons Attribution 4.0 International License ;ISSN: 0034-6535 ;EISSN: 1530-9142 ;DOI: 10.1162/003465304323031085

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  • Title:
    Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets
  • Author: Zbaracki, Mark J ; Ritson, Mark ; Levy, Daniel ; Dutta, Shantanu ; Bergen, Mark
  • Subjects: Economics and Finance ; Humanities and Social Sciences
  • Is Part Of: The review of economics and statistics, 2004-05, Vol.86 (2), p.514-533
  • Description: 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.
  • Publisher: Massachusetts Institute of Technology Press (MIT Press)
  • Language: English
  • Identifier: ISSN: 0034-6535
    EISSN: 1530-9142
    DOI: 10.1162/003465304323031085
  • Source: HAL SHS: Archive ouverte en Sciences de l'Homme et de la Société (Open Access)
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