The Magnitude of Menu Costs: Direct Evidence from Large U. S. Supermarket Chains

Abstract

We use store-level data to document the exact process of changing prices and to directly measure menu costs at ve multistore supermarket chains. We show that changing prices in these establishments is a complex process, requiring dozens of steps and a nontrivial amount of resources. The menu costs average $105,887/year per store, comprising 0.70 percent of revenues, 35.2 percent of net margins, and $0.52/price change. These menu costs may be forming a barrier to price changes. Speci cally, (1) a supermarket chain facing higher menu costs (due to item pricing laws that require a separate price tag on each item) changes prices two and one-half times less frequently than the other four chains; (2) within this chain the prices of products exempt from the law are changed over three times more frequently than the products subject to the law."In principle, xed costs of changing prices can be observed and measured. In practice, such costs take disparate forms in different rms, and we have no data on their magnitude. So the theory can be tested at best indirectly, at worst not at all" [Alan Blinder 1991, p. 90]. I. INTRODUCTIONThe costs of changing nominal prices, also known as "menu costs," have important macroeconomic implications. First, menu costs can be a source of price rigidity, and thus can provide a * Address all correspondence to the rst author. We are especially indebted to Peter Aranson, Nathan Balke, George Benston, Robert Chirinko, Leif Danziger, Anil Kashyap, John Leahy, Jeffrey Sandgren, the discussants John Driscoll at the American Economic Association meetings in San Francisco, January 1996, and Robert Hall at the NBER Economic Fluctuations Program meeting in Cambridge, MA, July 1996, the editor Olivier Blanchard, and an anonymous referee for providing valuable comments and suggestions. We are also grateful to Martin J. Bailey, Hashem Dezhbakhsh, Xavier Drèze, David Lilien, Paul Rubin, Eytan Sheshinski, Daniel Tsiddon, and seminar participants at the 1996 American Economic Association meetings, the marketing and the macroeconomics workshops at the University of Chicago, the economics workshops at Emory, Southern Methodist, and Texas A&M Universities, and the July 1996 NBER Economic Fluctuations Program meeting for useful discussions. Michael Caldwell, Pinaki Mitra, and Georg Mü ller provided research assistance. The second and third authors would like to thank the Graduate School of Business of the University of Chicago for funding. All authors contributed equally to the work. The usual disclaimer applies. micro-based explanation for monetary nonneutrality. Second, even small menu costs may be suf cient to generate substantial aggregate nominal rigidity and large business cycles.1 Consequently, menu costs have received considerable attention in the theoretical macroeconomics literature as many predictions generated by traditional Keynesian and more recent new Keynesian models crucially depend on the existence of some form of price rigidity. 2Despite the theoretical importance of menu costs, however, li...

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