The Dynamics of Markups and Inventories in Retailing Firms

Victor Aguirregabiria ()

Review of Economic Studies, 1999, vol. 66, issue 2, pages 275-308

Abstract: This paper is concerned with the interaction between price and inventory decisions in retailing firms and its implications for the dynamics of markups and the existence of sales promotions. The author considers a model where a monopolistically competitive retailer decides price and inventories, and assumes lump-sum costs when placing orders or changing nominal prices. In this model, the existence of stockout probabilities and fixed ordering costs generate a cyclical price behavior characterized by long periods without nominal price changes and short periods with very low prices (i.e., sales promotions). He estimates this model using a unique longitudinal dataset with information about retail and wholesale prices, inventories, orders, and sales for several brands in a supermarket chain. Based on the estimated model, the author performs several counterfactual experiments that show the important role that inventories and fixed ordering costs play in the dynamics of retail prices and the frequency of sales promotions in this dataset. Copyright 1999 by The Review of Economic Studies Limited.

Date: 1999
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