Hot and spicy: ups and downs on the price floor and ceiling at Japanese supermarkets

Abstract

This paper develops a model of dynamic pricing with menu cost for a monopolistic retail store. By examining the prices of two brands of curry paste, the model shows that frequent price changes appear to be the optimal price policy. The key reason behind this strategy is that customers differ in their willingness to pay, depending on whether they purchase the product for immediate consumption or to add to their inventory at home. The empirical results strongly support the model’s predictions that: (1) stores tend to lower prices when (a) the share of customers still holding inventory is low, and when (b) the expected number of customers is high; and (2) demand is negatively dependent on the duration of the lower price and positively dependent on the duration of the higher, regular price. Unlike in models that posit a negative dependence of current demand on past prices, the findings support the theory that inventory accumulation (when the price is low) and decumulation (when the price is high) drive short-run fluctuations in demand.