Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/259339 
Year of Publication: 
2003
Series/Report no.: 
Working Paper No. 2003-07
Publisher: 
Bar-Ilan University, Department of Economics, Ramat-Gan
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% 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, 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.
Subjects: 
Menu cost
cost of price adjustment
managerial cost
customer cost
convex cost of price adjustment
sticky prices
price rigidity
JEL: 
E12
E31
L16
F31
F41
Document Type: 
Working Paper

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