Menu Costs and the Bullwhip Effect: Supply Chain Implications of Dynamic Pricing

Abstract

Suppose that technology reduces price-adjustment costs (e.g., the costs of printing and changing price tags), and as a result prices at grocery stores change more dynamically. Will this change mean less stability or more stability for grocery supply chains? In other words, will more dynamic pricing downstream mean more last-minute purchases, more overtime work, and more empty space in trucks and warehouses? Or will it mean more regular and more standardized orders, smoother schedules, and less waste? To answer this question, we fit a pricing and ordering model to data from a large Chinese supermarket chain (daily prices, sales, inventories, and shipments from products from seven categories at 78 stores for 3.5 years) and then simulate a counterfactual grocery chain in which the estimated price-adjustment costs are set to zero. We find that the removal of price-adjustment costs stabilizes the supply chain, reducing both its shipment volatility, its sales volatility, and its bullwhip (the difference between the shipment and sales volatility).