Journal Article

Optimal Pricing with Costly Adjustment: Evidence from Retail-Grocery Prices

Margaret E. Slade

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 65, issue 1, pages 87-107
Published in print January 1998 | ISSN: 0034-6527
Published online January 1998 | e-ISSN: 1467-937X | DOI:
Optimal Pricing with Costly Adjustment: Evidence from Retail-Grocery Prices

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In many theoretical models, it is assumed that there are costs associated with adjusting prices. In this paper, the existence, type, and magnitude of such costs are investigated empirically. A discrete-choice dynamic-programming model that nests fixed and variable costs is developed, and econometric estimates of the adjustment-cost function are obtained. The data used to implement the model consist of weekly retail prices and sales of three brands of saltine crackers sold by four chains of grocery stores in a small U.S. town. The study has several distinguishing characteristics. First, the data are highly disaggregate (at the level of brand and store). Second, variables are sampled at weekly intervals. Third, the model nests fixed- and variable-adjustment costs and can therefore determine their relative importance. Finally, the discrete-choice model is both structural and dynamic.

Journal Article.  0 words. 

Subjects: Economics

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