Beyond the Cost of Price Adjustment: Investments in Pricing Capital

Mark Zbaracki, Mark Bergen, Daniel Levy () and Mark Ritson
Additional contact information
Mark Zbaracki: University of Pennsylvania
Mark Bergen: University of Minnesota
Mark Ritson: London Business School

No 2005-03, Working Papers from Bar-Ilan University, Department of Economics

Abstract: The literature on costs of price adjustment has long argued that changing prices is a complex and costly process. In fact, some authors have suggested that we should think of firms’ price-setting activities as “producing” prices, similar to the way firms use production processes to produce goods and services. In this paper we explore one natural extension of this view, that besides observing costs of price adjustment, we should also expect to see firm-level investments in capital expenditures into these “pricing” production processes. We coin the term “pricing capital” for these investments, and suggest that they can improve the efficiency of the “pricing production” activities by both reducing the costs of adjusting prices, and improving the effectiveness of price adjustments in future periods. Using two types of data sources, we find compelling evidence of the existence as well as the importance of pricing capital in firms. The existence of firm-level “pricing capital” has the potential of fundamentally altering the way we think about pricing and price adjustment in many areas of economics. It suggests looking toward the “pricing capital” to decipher the likely degree and causes of price rigidity and its variation across price setters, markets, and industries. Moreover, “pricing capital” introduces a new, higher-level, pricing decision made by individual firms. Decisions to invest in pricing capital compete with traditional capital investment decisions that have long been studied in economics, such as capital investments in plant, equipment, and R&D. Furthermore, since pricing capital is a choice variable, it implies that costs of price adjustment often used in models of price rigidity are endogenous. As such, pricing capital offers new insights into the micro-foundations of the costs of price adjustment. The most provocative implication of the new theory of pricing, however, is that the allocative efficiency of the price system itself may be determined endogenously by individual price setters who choose whether and how much to invest in pricing capital.

Keywords: Economic Cost of Price Adjustment; Menu Cost; Managerial and Customer Costs of Price Adjustment; Pricing Capital; Price Rigidity; Sticky Prices; Rigid Prices; Micro-foundations; Allocative Efficiency; Price System; Endogenous Price Adjustment Cost (search for similar items in EconPapers)
JEL-codes: D21 D4 E12 E31 L11 L16 L22 (search for similar items in EconPapers)
Date: 2005-05
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www2.biu.ac.il/soc/ec/wp/3-05/3-05.html Working paper (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to www2.biu.ac.il:443 (A connection attempt failed because the connected party did not properly respond after a period of time, or established connection failed because connected host has failed to respond.)

Related works:
Working Paper: Beyond the Cost of Price Adjustment: Investments in Pricing Capital (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:biu:wpaper:2005-03

Access Statistics for this paper

More papers in Working Papers from Bar-Ilan University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Department of Economics ().