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.

[1]  S. Peltzman,et al.  PRICES RISE 467 The Great Pork Gap : Hog Prices Have Plummeted , 2007 .

[2]  R. Gordon.  What Is New-Keynesian Economics? , 1990 .

[3]  J. D. Hess,et al.  Can Bait and Switch Benefit Consumers , 1990 .

[4]  Pradeep K. Chintagunta,et al.  Investigating Category Pricing Behavior at a Retail Chain , 2002 .

[5]  Steven M. Shugan,et al.  Branded Variants: A Retail Perspective , 1996 .

[6]  Peter E. Rossi,et al.  Why Don't Prices Rise During Periods of Peak Demand? Evidence from Scanner Data , 2002 .

[7]  Shantanu Dutta,et al.  Menu costs, posted prices, and multiproduct retailers , 1999 .

[8]  M. Parry,et al.  Channel Coordination When Retailers Compete , 1995 .

[9]  Shantanu Dutta,et al.  Price Flexibility in Channels of Distribution: Evidence from Scanner Data , 2002 .

[10]  P. Kopalle,et al.  Asymmetric Reference Price Effects and Dynamic Pricing Policies , 1996 .

[11]  Carl F. Mela,et al.  Does Bait and Switch Really Benefit Consumers , 1998 .

[12]  R. Dornbusch,et al.  Inflation, debt, and indexation , 1985 .

[13]  Daniel Levy,et al.  Price Adjustment at Multiproduct Retailers , 1998 .

[14]  J. D. Hess,et al.  Loss Leader Pricing and Rain Check Policy , 1987 .

[15]  Mark J. Zbaracki,et al.  Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets , 2004 .

[16]  M. Slade.  Optimal Pricing with Costly Adjustment: Evidence from Retail-Grocery Prices , 1998 .

[17]  Koen Pauwels,et al.  Who Benefits from Store Brand Entry , 2004 .

[18]  Geoffrey H. Moore,et al.  The National Bureau of Economic Research , 1950 .

[19]  N. Mankiw,et al.  A sticky-price manifesto , 1994 .

[20]  S. Borenstein,et al.  Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes , 1997 .

[21]  K. Moorthy.  Strategic Decentralization in Channels , 1988 .

[22]  Ganesh Iyer,et al.  Coordinating Channels Under Price and Nonprice Competition , 1998 .

[23]  Susanto Basu,et al.  Intermediate Goods and Business Cycles: Implications for Productivity and Welfare , 1994 .

[24]  R. Tyagi.  A Characterization of Retailer Response to Manufacturer Trade Deals , 1999 .

[25]  Gregory T. Gundlach,et al.  Aggressive and Predatory Pricing: A Framework for Analysis , 1996 .

[26]  Olivier J. Blanchard,et al.  Price Asynchronization and Price Level Inertia , 1982 .

[27]  Dhruv Grewal,et al.  Pricing and Public Policy: A Research Agenda and an Overview of the Special Issue , 1999 .

[28]  Mark E. Bergen,et al.  Understanding Cooperative Advertising Participation Rates in Conventional Channels , 1997 .

[29]  Peter E. Rossi,et al.  Determinants of Store-Level Price Elasticity , 1995 .

[30]  Hoy F. Carman,et al.  Price asymmetry and marketing margin behavior: An example for California—Arizona citrus , 1990 .

[31]  Aviv Nevo.  Measuring Market Power in the Ready-to-Eat Cereal Industry , 1998 .

[32]  Anil K. Kashyap.  Sticky Prices: New Evidence from Retail Catalogs , 1995 .

[33]  Severin Borenstein,et al.  Dynamic Pricing in Retail Gasoline Markets , 1993 .

[34]  Roland Bénabou,et al.  Search with Learning from Prices: Does Increased Inflationary Uncertainty Lead to Higher Markups? , 1993 .

[35]  R. Selten.  The chain store paradox , 1978 .

[36]  Martin Pesendorfer.  Retail sales: a study of pricing behavior in supermarkets , 2002 .

[37]  Edward W. McLaughlin,et al.  Modeling the Decision to Add New Products by Channel Intermediaries , 1989 .

[38]  James D. Hess,et al.  Price Discrimination through a Distribution Channel: Theory and Evidence , 1994 .

[39]  Mark E. Bergen,et al.  Asymmetric Price Adjustment in the Small: An Implication of Rational Inattention , 2005 .

[40]  Jeffrey D. Karrenbrock.  The behavior of retail gasoline prices: symmetric or not? , 1991 .

[41]  Daniel Levy,et al.  Heterogeneity in Price Rigidity: Evidence from a Case Study Using Microlevel Data , 2002 .

[42]  R. Roll.  Orange Juice and Weather , 1984 .

[43]  E. Greenleaf.  The Impact of Reference Price Effects on the Profitability of Price Promotions , 1995 .

[44]  Milton S. Boyd,et al.  Price Asymmetry in the U.S. Pork Marketing Channel , 1988 .

[45]  R. Ward.  Asymmetry in Retail, Wholesale, and Shipping Point Pricing for Fresh Vegetables , 1982 .

[46]  Preyas S. Desai,et al.  Let Me Talk to My Manager: Haggling in a Competitive Environment , 2004 .

[47]  Paul H. Rubin,et al.  When Little Things Mean a Lot: On the Inefficiency of Item Pricing Laws , 2006 .

[48]  J. Madsen,et al.  Asymmetric price adjustment in a menu-cost model , 1998 .

[49]  E. Rasmusen.  Games and Information: An Introduction to Game Theory , 2006 .

[50]  G. Müller,et al.  Asymmetric Price Adjustment: Evidence from Weekly Product-Level Scanner Price Data , 2007 .

[51]  Pradeep K. Chintagunta,et al.  Manufacturer-Retailer Channel Interactions and Implications for Channel Power: An Empirical Investigation of Pricing in a Local Market , 2000 .

[52]  David Neumark,et al.  Market structure and the nature of price rigidity: evidence from the market for consumer deposits , 1992 .

[53]  L. Danziger.  Inflation, Fixed Cost of Price Adjustment, and Measurement of Relative-Price Variability: Theory and Evidence , 1987 .

[54]  Allen N. Berger,et al.  The Rigidity of Prices: Evidence from the Banking Industry , 1991 .

[55]  Allen M. Weiss,et al.  Unbundling of Industrial Systems , 1990 .

[56]  G. Tellis,et al.  Tackling the Retailer Decision Maze: Which Brands to Discount, How Much, When and Why? , 1995 .

[57]  N. Gregory Mankiw,et al.  Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly , 1985 .

[58]  Rajiv Lal,et al.  Manufacturer Trade Deals and Retail Price Promotions , 1990 .

[59]  B. Ratchford,et al.  An Empirical Investigation of Returns to Search , 1993 .

[60]  S. C. Choi,et al.  Price Competition in a Channel Structure with a Common Retailer , 1991 .

[61]  Richard Staelin,et al.  Manufacturer Allowances and Retailer Pass-Through Rates in a Competitive Environment , 1999 .

[62]  M. Bergen,et al.  The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains , 1997 .

[63]  P. Cagan.  The hydra-headed monster : the problem of inflation in the United States , 1976 .

[64]  D. Carlton,et al.  The Rigidity of Prices , 1986 .

[65]  R. Bacon.  Rockets and feathers: the asymmetric speed of adjustment of UK retail gasoline prices to cost changes , 1991 .

[66]  Wroe Alderson.  A Marketing View of Competition , 1937 .

[67]  A. Kashyap,et al.  Sticky Prices: New Evidence from Retail Catalogs , 1994 .

[68]  V. Rao,et al.  A Friction Model for Describing and Forecasting Price Changes , 1987 .

[69]  Stephen G. Cecchetti.  The frequency of price adjustment: A study of the newsstand prices of magazines , 1986 .

[70]  A. Blinder,et al.  Asking About Prices: A New Approach to Understanding Price Stickiness , 1998 .

[71]  J. M. Villas-Boas.  Product Line Design for a Distribution Channel , 1998 .

[72]  S. Peltzman.  Prices Rise Faster than They Fall , 2000, Journal of Political Economy.

[73]  R. Rao.  Pricing and Promotions in Asymmetric Duopolies , 1991 .

[74]  Paul R. Messinger,et al.  Has Power Shifted in the Grocery Channel , 1995 .