Holiday Price Rigidity and Cost of Price Adjustment

Abstract

The Thanksgiving-Christmas holiday period is a major sales period for US retailers. Due to higher store traffic, tasks, such as restocking shelves, handling customers' questions and inquiries, running cash registers, cleaning and bagging, become more urgent during holidays. As a result, the holiday-period opportunity cost of price adjustment may increase dramatically for retail stores, which should lead to greater price rigidity during holidays. We test this prediction using weekly retail scanner price data from a major Midwestern supermarket chain. We find that, indeed, prices are more rigid during holiday periods than non-holiday periods. For example, the econometric model we estimate suggests that the probability of a price change is lower during holiday periods, even after accounting for cost changes. Moreover, we find that the probability of a price change increases with the size of the cost change, during both the holiday as well as non-holiday periods. We argue that these findings are best explained by higher price adjustment costs (menu cost) the retailers face during the holiday periods. Our data provides a natural experiment for studying variation in price rigidity because most aspects of market environment such as market structure, industry concentration, the nature of long-term relationships, contractual arrangements, etc. do not vary between holiday and non-holiday periods. We, therefore, are able to rule out these commonly used alternative explanations for the price rigidity, and conclude that the menu cost theory offers the best explanation for the holiday period price rigidity.

Christmas Economics - A Sleigh Ride

“…In particular, as store tra¢c is higher during this time, the shop employees are busy "restocking shelves, handling customers' questions and inquiries, running cash registers, cleaning and bagging." Data supports Levy et al's (2010) hypothesis that prices are more rigid during holiday periods. Both the frequency of price increases and decreases are reduced during the holiday period.…”

“…He agrees that there is empirical evidence for decreasing prices before Christmas, but maybe, prices are also rigid during this period. Using the same data set as Chevalier et al (2003) and Nevo and Hatzitaskos (2006) Levy et al (2010) show that price rigidity might be high during the Christmas holiday period. Levy et al (2010) suggest that this rigidity might be driven by the opportunity cost of price adjustments.…”

“…Using the same data set as Chevalier et al (2003) and Nevo and Hatzitaskos (2006) Levy et al (2010) show that price rigidity might be high during the Christmas holiday period. Levy et al (2010) suggest that this rigidity might be driven by the opportunity cost of price adjustments. During the busy times prior to holidays, it costs the stores relatively more to change prices than during less busy periods.…”

Not All Price Endings Are Created Equal: Price Points and Asymmetric Price Rigidity

“…Consequently, consumers are less likely to recognize a bigger price that ends with 9 and less likely to notice a price increase when the new price ends with 9. For price decreases, however, 9-endings do not seem to play a 1 See, for example, Rotemberg (1982Rotemberg ( , 1987Rotemberg ( , 2005Rotemberg ( , 2010, Mankiw (1985), Carlton (1986), Tsiddon (1992, 1996), Konieczny (1993), Warner and Barsky (1995), Danziger (1999), Dutta, et al (2002), Ball and Romer (2003), Levy and Young (2004), Bils and Klenow (2004), Zbaracki, et al (2004), Steinsson (2008, 2009), Midrigan (2008, 2010), Klenow and Kryvtsov (2008), Levy, et al (2010), Midrigan (2011), and Eichenbaum, et al (2011). For recent surveys, see Willis (2003), Wolman (2007), and Klenow and Malin (2011).…”

Micro Empirical Evidence on Price Adjustment

“…In the aspect of holidays, Levy et al (2010) state that the price changes of the Thanksgiving-Christmas period in the U.S. is less frequent. This statement can be shown in table 8 below.…”