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The Relation between Inventory Investment and Price Dynamics in a Distributive Firm

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  • Tonogi, Akiyuki

Abstract

In this paper, we examine the role of inventory in the price-setting behavior of a distributive firm. Empirically, we show that probability of price change has a positive relation to the scale of the retailer’s storage and the frequency of its bargain sales. We also show a negative relation between the frequency of bargain sales and the price elasticity of demand. These results denote that price stickiness varies by the retailers’ characteristics. In this paper, we consider that the hidden mechanism of price stickiness comes from the retailer’s policy for inventory investment. We develop a partial equilibrium model of the retailer’s optimization behavior with inventory and financial restrictions. The results of the numerical experiments suggest that price change frequency depends on the retailer’s order cost, storage cost, and menu cost.

Suggested Citation

  • Tonogi, Akiyuki, 2013. "The Relation between Inventory Investment and Price Dynamics in a Distributive Firm," Research Center for Price Dynamics Working Paper Series 8, Research Center for Price Dynamics, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:rcpdwp:8
    Note: April, 2013
    as

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    References listed on IDEAS

    as
    1. Oleksiy Kryvtsov & Virgiliu Midrigan, 2013. "Inventories, Markups, and Real Rigidities in Menu Cost Models," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(1), pages 249-276.
    2. Victor Aguirregabiria, 1999. "The Dynamics of Markups and Inventories in Retailing Firms," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(2), pages 275-308.
    3. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
    4. Blinder, Alan S, 1982. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," American Economic Review, American Economic Association, vol. 72(3), pages 334-348, June.
    5. Cecchetti, Stephen G., 1986. "The frequency of price adjustment : A study of the newsstand prices of magazines," Journal of Econometrics, Elsevier, vol. 31(3), pages 255-274, April.
    6. Anil K Kashyap, 1995. "Sticky Prices: New Evidence from Retail Catalogs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(1), pages 245-274.
    7. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-679, September.
    8. Alan S. Blinder, 1981. "Retail Inventory Behavior and Business Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 443-520.
    9. Fabiani, Silvia & Loupias, Claire & Martins, Fernando & Sabbatini, Roberto (ed.), 2007. "Pricing Decisions in the Euro Area: How Firms Set Prices and Why," OUP Catalogue, Oxford University Press, number 9780195309287.
    10. Abe, Naohito & Tonogi, Akiyuki, 2010. "Micro and macro price dynamics in daily data," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 716-728, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Inventory; Price Stickiness; Numerical Experiment; (S; s) Policy;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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