OPTIMAL PRICING WITH COSTLY ADJUSTMENT - EVIDENCE FROM RETAIL-GROCERYPRICES

In many theoretical models, it is assumed that there are costs associa ted with adjusting prices. In this paper, the existence, type, and mag nitude of such costs are investigated empirically. A discrete-choice d ynamic-programming model that nests fixed and variable costs is develo ped, and econometric estimates of the adjustment-cost function are obt ained. The data used to implement the model consist of weekly retail p rices and sales of three brands of saltine crackers sold by four chain s of grocery stores in a small U.S. town. The study has several distin guishing 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 d iscrete-choice model is both structural and dynamic.