THE MAGNITUDE OF MENU COSTS - DIRECT EVIDENCE FROM LARGE US SUPERMARKET CHAINS

We use store-level data to document the exact process of changing pric es and to directly measure menu costs at five multistore supermarket c hains. We show that changing prices in these establishments is a compl ex process, requiring dozens of steps and a nontrivial amount of resou rces. 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 chan ge. These menu costs may be forming a barrier to price changes. Specif ically, (1) a supermarket chain facing higher menu costs (due to item pricing laws that require a separate price tag on each item) changes p rices two and one-half times less frequently than the other four chain s; (2) within this chain the prices of products exempt from the law ar e changed over three times more frequently than the products subject t o the law.