Journal Article

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

Daniel Levy, Mark Bergen, Shantanu Dutta and Robert Venable

in The Quarterly Journal of Economics

Published on behalf of President and Fellows of Harvard University

Volume 112, issue 3, pages 791-824
Published in print August 1997 | ISSN: 0033-5533
Published online August 1997 | e-ISSN: 1531-4650 | DOI: https://dx.doi.org/10.1162/003355397555352
The Magnitude of Menu Costs: Direct Evidence from Large U. S. Supermarket Chains

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We use store-level data to document the exact process of changing prices and to directly measure menu costs at five 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. Specifically, (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, fixed costs of changing prices can be observed and measured. In practice, such costs take disparate forms in different firms, 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].

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Subjects: Economics

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