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

Mark Zbaracki, Mark Ritson, Daniel Levy (), Shantanu Dutta and Mark Bergen
Additional contact information
Mark Zbaracki: Pennsylvania
Mark Ritson: London Business School
Shantanu Dutta: USC
Mark Bergen: Minnesota

Macroeconomics from University Library of Munich, Germany

Abstract: 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 the 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 six times, and customer costs are more than twenty times, the menu costs. In total, the price adjustment costs comprise 1.22 percent of the company’s revenue and 20.03 percent of the company’s net margin. We show that many components of the managerial and customer costs are convex, while 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.

Keywords: Menu Cost; Cost of Price Adjustment; Managerial Cost; Customer Cost; Information Gathering Cost; Information Processing Cost; Decision Making Cost; Communication Cost; Thinking Cost; Negotiation Cost; Customer Antagonization Cost; Convex Cost of Price Adjustment; Sticky Prices; Price Rigidity (search for similar items in EconPapers)
JEL-codes: E12 E31 E50 F31 F41 L11 L16 L22 L60 L81 M21 M31 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2004-02-07
New Economics Papers: this item is included in nep-com and nep-ind
Note: Type of Document - pdf; prepared on Win 98; to print on Any printer; pages: 48 ; figures: There are no figures
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Related works:
Journal Article: Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets (2004)
Journal Article: Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets (2004)
Working Paper: Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets (2004)
Working Paper: Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0402020

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