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THE MAGNITUDE OF MENU COSTS: DIRECT EVIDENCE
FROM LARGE U. S. SUPERMARKET CHAINS*
DAN IE L LEVY
MARK BERGEN
SHANTANU DUT TA
ROBERT VENABLE
We use store-level data to document the exact process of changing prices and
to directly measure menu costs at ve multistore supermarket chains. We show
that changing prices in these establishments is a complex process, requiring doz-
ens of steps and a nontrivial amount of resources. 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 change. These menu costs may be forming a barrier to
price changes. Specically, (1) a supermarket chain facing higher menu costs (due
to item pricing laws that require a separate price tag on each item) changes prices
two and one-half times less frequently than the other four chains; (2) within this
chain the prices of products exempt from the law are changed over three times
more frequently than the products subject to the law.
“In principle, xed costs of changing prices can be observed and
measured. In practice, such costs take disparate forms in different
rms, and we have no data on their magnitude. So the theory can
be tested at best indirectly, at worst not at all” [Alan Blinder 1991,
p. 90].
I. INTRODUCTION
The costs of changing nominal prices, also known as “menu
costs,” have important macroeconomic implications. First, menu
costs can be a source of price rigidity, and thus can provide a
* Address all correspondence to the rst author. We are especially indebted
to Peter Aranson, Nathan Balke, George Benston, Robert Chirinko, Leif Danziger,
Anil Kashyap, John Leahy, Jeffrey Sandgren, the discussants John Driscoll at the
American Economic Association meetings in San Francisco, January 1996, and
Robert Hall at the NBER Economic Fluctuations Program meeting in Cambridge,
MA, July 1996, the editor Olivier Blanchard, and an anonymous referee for pro-
viding valuable comments and suggestions. We are also grateful to Martin J. Bai-
ley, Hashem Dezhbakhsh, Xavier Dre
`ze, David Lilien, Paul Rubin, Eytan
Sheshinski, Daniel Tsiddon, and seminar participants at the 1996 American Eco-
nomic Association meetings, the marketing and the macroeconomics workshops
at the University of Chicago, the economics workshops at Emory, Southern Meth-
odist, and Texas A&M Universities, and the July 1996 NBER Economic Fluctua-
tions Program meeting for useful discussions. Michael Caldwell, Pinaki Mitra,
and Georg Mu¨ ller provided research assistance. The second and third authors
would like to thank the Graduate School of Business of the University of Chicago
for funding. All authors contributed equally to the work. The usual disclaimer
applies.
q1997 by the President and Fellows of Harvard College and the Massachusetts Institute
of Technology.
The Quarterly Journal of Economics, August 1997.
micro-based explanation for monetary nonneutrality. Second,
even small menu costs may be sufcient to generate substantial
aggregate nominal rigidity and large business cycles.1Conse-
quently, menu costs have received considerable attention in the
theoretical macroeconomics literature as many predictions gener-
ated by traditional Keynesian and more recent new Keynesian
models crucially depend on the existence of some form of price
rigidity.2
Despite the theoretical importance of menu costs, however,
little is known about their actual magnitude, as the above quota-
tion from Blinder succinctly reects. Because of the practical dif-
culty of measuring menu costs directly, a common feature of the
existing empirical studies of menu costs is that they all provide
indirect evidence.3Yet many authors, including Blinder [1994],
Kashyap [1995], and Slade [1996a], have emphasized the impor-
tance of assessing the empirical relevance of menu costs at the
level of individual rms. For example, according to Slade [1996a,
p. 19], “Given the large number of theoretical papers that evalu-
ate the implications of [price] adjustment costs, obtaining direct
evidence that such costs are present seems crucial.”
Our primary contribution in this paper is providing direct
measures of menu costs at ve large U. S. retail supermarket
chains. Using a unique store-level data set, we show that chang-
ing prices in these establishments is a complex process, requiring
dozens of steps and a nontrivial amount of resources. The menu
costs reported in this study are made up of (1) the labor cost of
changing shelf prices, (2) the costs of printing and delivering new
price tags, (3) the costs of mistakes made during the price change
process, and (4) the cost of in-store supervision of the price
change process.4We nd that the measurable components of
menu costs for the four chains that are not subject to an item
1. See Akerlof and Yellen [1985], Mankiw [1985], Parkin [1986], Blanchard
and Kiyotaki [1987], Caplin and Leahy [1991, 1997], and Caplin [1993].
2. See, for example, Mankiw and Romer [1991], Sheshinski and Weiss [1993],
Andersen [1994], Ball and Mankiw [1994], Romer [1996], and studies cited
therein.
3. These studies include Sheshinski, Tishler, and Weiss [1981]; Rotemberg
[1982]; Lieberman and Zilberfarb [1985]; Carlton [1986, 1989]; Cecchetti [1986];
Danziger [1987]; Ball, Mankiw, and Romer [1988]; Gordon [1990]; Lach and Tsid-
don [1992, 1996]; Blinder [1994]; Eden [1994]; Amano and Macklem [1995]; Ball
and Mankiw [1995]; Kashyap [1995], Warner [1995], Warner and Barsky [1995],
and Slade [1996a, 1996b].
4. We also discuss other components of menu costs, including the costs of
making corporate level managerial price change decisions and provide some evi-
dence on their approximate magnitude, although we do not include these gures
in the measures of menu cost we report.
QUARTERLY JOURNAL OF ECONOMICS792
price law average $105,887 annually per store. In relative terms,
these menu costs comprise 0.70 percent of revenues, 35.2 percent
of net margins, and $0.52 per price change, on average.
Our second major contribution in this paper is providing evi-
dence that these menu costs can form a barrier to price change
activity at these chains, offering direct support for the relation-
ship between menu costs and store-level individual price rigidity.
We present three types of evidence that these menu costs form a
barrier to price change activity at these rms. First, we contrast
the price change activity of a chain that operates in a state with
an item pricing law with the rst four chains that operate in
states not subject to such laws. Item pricing laws require that a
separate price tag be placed on each individual item sold (in addi-
tion to the shelf price tag). We show that the average menu cost
per price change for the chain subject to the item pricing law is
$1.33, over two and a half times the corresponding gure for the
other four chains ($0.52). These larger menu costs lead to very
different levels of price change activity by these chains. Specifi-
cally, the four supermarket chains that are not subject to item
pricing laws on average change prices on 15.6 percent of the prod-
ucts they carry each week. In contrast, the chain that is subject
to the item pricing law (and therefore faces higher menu costs),
changes prices on only 6.3 percent of the products it carries,
which is less than half the average of the other four chains.
Second, within the chain facing the item pricing law, there
are 400 products that are exempt from this law and thereby face
lower menu costs. For these products the chain each week
changes the prices of 21 percent of the products on average, which
is over three times more frequently than for products subject to
the item pricing law. Third, we provide evidence from the super-
market chains that the menu costs they incur form a barrier to
certain cost-based price adjustments. Specically, we show that
the chains not subject to item pricing laws each week experience
cost increases on about 800–1000 products they sell. Yet, they ad-
just prices of only about 70–80 percent of these products. The
remaining 20–30 percent of the prices are not adjusted immedi-
ately because the existing menu costs make the necessary price
adjustment unprotable. Considerin g all three of these ndings
together, we conclude that menu costs can indeed affect price
change activity at the level of the individual rm—offering direct
evidence that these menu costs are relevant to marginal price
change decisions. Finally, on a related macroeconomic issue we
THE MAGNITUDE OF MENU COSTS 793
provide empirical evidence which suggests that the price change
process in these supermarket chains has a strong time-
dependent element.
Relating our ndings to the existing theoretical models, we
conclude that the magnitude of the menu costs we nd is large
enough to be capable of having macroeconomic signicance. First,
recall that according to the studies of Akerlof and Yellen [1985],
Mankiw [1985], Parkin [1986], and Caplin and Leahy [1997] even
small menu costs can be relevant since they may be sufcient to
generate substantial aggregate nominal rigidity and thus large
business cycles. Second, when considered in the context of the
theoretical menu cost models of Blanchard and Kiyotaki [1987]
and Ball and Romer [1990], we nd that the menu cost gures
we report are “nontrivial” and their relative magnitudes cross the
minimum theoretical threshold needed to form a barrier to price
adjustments.
Although in this paper we provide direct measurements of
the marginal costs associated with changing prices, it should be
mentioned that there are still many aspects of menu costs we are
unable to measure. In particular, we do not provide measure-
ments of the marginal benets associated with changing prices,
which can be signicant [Lieberman and Zilberfarb 1985; She-
shinski and Weiss 1977]. At the local level this industry is ex-
tremely competitive [Calatone et al. 1989; Progressive Grocer,
November 1992, p. 50; Chevalier 1995]. In such a competitive in-
dustry the benets of frequently changing prices can be high, as
unmatched price cuts or consumer perceptions of higher prices
can lead to signicant losses in sales.5This helps explain why,
despite the magnitude of the menu costs we found, we still ob-
serve frequent weekly price change activity by the chains we
study. For example, stores change an average of 15–16 percent of
their prices each week. Also, they seem to adjust the prices of
70–80 percent of the products for which they experience cost in-
creases.6Thus, although we have evidence that the menu costs
we report in this study clearly matter in the sense that they cre-
5. Also, changing prices frequently can make it more difcult for customers
to compare prices of branded items across supermarkets because of higher search
costs [Carlton 1986], which is valuable for creating differentiation between retail
outlets [Bergen, Dutta, and Shugan 1996].
6. This level of price change activity is similar to that found in other studies
of U. S. supermarket prices [Dutta, Bergen, and Levy 1995], although the price
reaction to cost changes can be signicantly more rigid depending on the nature
of the cost changes the retailer faces [Levy, Dutta, and Bergen 1996].
QUARTERLY JOURNAL OF ECONOMICS794
ate some barriers to price change activity at these retail super-
market outlets, they are not large enough to prevent a signicant
share of prices to adjust.
The paper is organized as follows. In Section II we describe
the data. In Section III we discuss the price change process in
supermarket chains and report absolute measures of menu costs.
In Section IV we assess the effect of item pricing laws on menu
costs. In Section V we discuss the signicance of the menu costs.
We end with conclusions and suggestions for future research.
II. DATA DESCRIPTION
The data come from a company that sells electronic shelf la-
bel (ESL) systems. These systems allow retailers to change the
shelf prices electronically from a central computer (where price
changes are actually done) via a wireless communication system
and thus reduce the physical costs and lead times currently asso-
ciated with changing shelf prices. In order to sell the product, the
company needed to validate what the existing costs of changing
shelf prices were in supermarket chains, i.e., the existing levels
of menu costs. This company received access from corporate head-
quarters at each of the ve chains in our sample to go to represen-
tative stores and carefully record the exact steps involved in the
price change process. These studies considered the entire price
change process in each chain. For this, detailed work-ow sche-
matics of each task in the price change process was developed .
Observations of the process were conducted in multiple stores of
the chains (at least two representative stores for each chain) to
verify its accuracy. Information received from chains’ pricing sys-
tems, in-store observations, in-store counts, and in-store time
measurements (with a stopwatch) were used to determine the
volume of work performed in each step of the tasks, weekly fre-
quency of each step performed, and the exact amount of time re-
quired to perform one unit of the work. After computing the total
hours per task, this information was reconciled with the known
total hours spent each week. This allowed for task level compari-
sons for the existing and test process. Each study required hun-
dreds of man-hours to create. The studies were conducted during
the years 1991–1992.
Although we believe the menu costs reported in this paper
are representative of menu costs in the U. S. supermarket indus-
try, we should mention that they may be biased upward because
THE MAGNITUDE OF MENU COSTS 795
the rm had an incentive to overestimate the magnitude of the
menu costs in order to sell the ESL system. We think, however,
that the menu cost measures we report in this paper are not sub-
ject to signicant biases of this sort for a number of reasons.
First, the ESL people measured and documented all price change
activities jointly with the supermarket employees using the wage
gures provided by the supermarket management. Second, time
and motion measurements of the type used for measuring the
menu costs we report here are routinely done by supermarket
chains themselves in order to assess the efciency of their price
change processes. The supermarket managers compared their
gures to the ESL company gures and found them to be similar.
Further, these gures were presented to upper management of
these chains and were found to be representative of their cost
structures. In fact, the validity of the menu cost measures con-
structed by the ESL company was never disputed. If there was
any disagreement between the ESL company and the supermar-
ket chains, it was about the size of the savings the ESL system
would provide, not about the accuracy of the menu cost measure-
ments.7Further, we looked at these reports and searched for g-
ures that could be biased upward. There were a few, such as loss
of goodwill costs and inventory holding costs, and to be on the
conservative side we did not include them in our measures of
menu costs. Thus, we only report gures for which we could see
no upward bias. Finally, note that the menu cost gures we report
are clearly biased downward because we were unable to measure
in dollar terms several components of menu costs and thus they
are not included in our gures (see subsection III.5 for details).
Table I displays some general information about the super-
market chains we study, their pricing strategy, and information
about the frequency of weekly price changes the stores under-
take. The chains involved in this study are all large U. S. super-
market chains, from different regions in the United States,
ranging from the Northeast to the West Coast, and operating an
average of 400 stores each. At the request of these retailers we
will keep the companies in this study anonymous, but they are
all large, multistore chains that seem reasonably representative
of large supermarket chains currently selling in the United
7. Indeed, four out of the ve chains included in our sample have purchased
ESL systems; three of the four actually purchased multiple systems (between two
and twenty systems), and Chain E is considering buying 50 more.
QUARTERLY JOURNAL OF ECONOMICS796
TABLE I
GENE RA L INFOR MA TION O N EAC H SUPE RMA RK ET CHA IN A ND THE IR PRICE
CHANGE ACT IVIT Y
Chain Chain Chain Chain Average of Chain E (item
A B C D chains A–D pricing law)
General pricing
strategyaHL HL EDLP EDLP HL
Number of price
changes per
store per week 4278 4316 3846 3223 3916 1578
% of products
for which prices
change in an
average weekb17.11 17.26 15.38 12.89 15.66 6.31
a. HL (High /Low) a nd EDLP (Every Da y Low P rice) refer to the general p ricing stra tegy followe d by the
retail chain . Under the E DLP strat egy, the retailer’s price s are low for e xtended pe riods of tim e, and there-
fore it will offer fewe r promotiona l sales or discounts . Under t he HL pricin g strategy, in contrast, the retail-
er’s prices a re higher, and the re tailer t ends to offer m ore frequen t discount s through s ales and prom otions.
See the text fo r more deta ils.
b. The s hare of product s for which price s change o n an avera ge week is t he ratio of numb er of price
changes pe r store per week to 2 5,000. Th e latter is th e avera ge number o f products carried p er store ea ch
week.
States. These chains are similar in the variety, selection, and
quantity of the products they carry. Supermarket chains of this
type make up $310,146,666,000 in total annual sales, which is
86.3 percent of total supermarket chain sales in 1992 [Supermar-
ket Business 1993], so the chains in our sample are representativ e
of a major class of the retail grocery trade.
According to the second row in Table I, the number of weekly
price changes in Chains A–D ranges from 3223 to 4316 for an
average of 3916 per store.8The variation in the number of weekly
price changes across the chains is due in large part to their choice
of pricing strategy: Chains A and B follow a high/low (HL) price
strategy, while Chains C and D follow an everyday-low-pric e
strategy (EDLP). Under the EDLP strategy the retailer’s prices
are low for an extended period of time, and therefore it will offer
fewer promotional sales or discounts. Under the HL pricing strat-
egy, in contrast, the retailer ’s prices are higher, and the retailer
tends to offer more frequent discounts through sales and promo-
tions. The pricing strategy, therefore, will have an effect on the
frequency of price changes observed. In particular, we would ex-
8. Since Chain E is subject to an item pricing law, it is discussed separately
in Section IV.
THE MAGNITUDE OF MENU COSTS 797
pect EDLP stores to have less frequent price changes in compari-
son to the HL stores. Indeed, according to Table I, Chains A and
B tend to have a higher number of weekly price changes (4278
and 4316, respectively) than Chains C and D (3846 and 3223,
respectively).
Supermarkets of the size we study tend to carry around
25,000 different items on a regular basis.9The last row in the
table presents the share of the 25,000 products for which the su-
permarket chains change their prices in a period of one week.
The average share for the four chains is 15.66 percent.
III. ABSOLUTE MEASURES OF MENU COSTS
There are four components of menu costs that we are able to
measure in dollar terms.1 0 These are (1) the cost of labor required
to change the shelf price tags, (2) the cost of printing and deliv-
ering new price tags, (3) the cost of mistakes made during the
process of changing prices, and (4) the cost of in-store supervision
time spent on implementing price changes.
III.1. Costs of the Labor Required to Change Shelf Prices
Figure I displays an overview of the steps involved in chang-
ing prices at Chain A. There are three main components in the
labor costs incurred by the chains: (a) labor cost of tag change
preparation, (b) labor cost of the tag change itself, and (c) labor
cost of verifying whether the price changes are done correctly,
which include tag change verication, in-store resolution of price
mistakes, and zone and corporate resolution of price mistakes.11
9. The supermarkets often have about 40,000 UPC codes in their computer
database records, but internal studies undertaken by the ESL company indicate
that the supermarkets usually carry no more than 25,000 products at any given
time. The extra UPC codes are for seasonal or promotional sizes and packages of
products, and for discontinued products.
10. In this paper we only report measures of the marginal cost of changing
prices. The costs of putting a price tag for the rst time, and other costs that
would be included in the average cost, are not included in the gures we report.
Only when discussing Chain E, which is the chain subject to item pricing laws,
did we face the issue of cost of pricing (at the rst time) versus the cost of changing
a price. Since there was no clear way of separating the two types of costs, the
reported cost gure ($44,168, in the second paragraph of Section IV) was excluded
altogether from our calculations. Also see footnote 13.
11. For a detailed description of the entire price change process with ow-
charts documenting the specic steps undertaken in this process and the exact
time period spent on each step, see Levy, Dutta, Bergen, and Venable [1997]. An
appendix reporting computational details, are contained in a working paper ver-
sion of this paper which is available upon request.
QUARTERLY JOURNAL OF ECONOMICS798
FIGUR E I
Overview of the Price Change Process
POS denotes Point of Sale and refers to the cash register or the database it
is connected to or both. For information on the various steps undertaken in each
stage of the price change process and the amount of the labor time spent on most
time-consuming steps, see Table II.
Standard price tag changes, which include the steps outlined on
the left-hand side of Figure I, make up the majority of price
changes in these chains. Some price changes also require addi-
tional price signs to be placed at different locations in the store,
such as on an end of aisle display or near the shelf.12 These sign
12. These are usually related to the product being on promotion, feature ad-
vertising, display, or in-store sale such as “manager’s special,” “today’s special,”
etc. The steps involved in making sign changes are similar to price changes. The
main differences are that (i) the time required for each of the steps in sign changes
THE MAGNITUDE OF MENU COSTS 799
changes add to the menu costs, and they are outlined on the
right-hand side of Figure I: the sign change preparation, actual
sign changes, and sign change verication boxes. The bottom two
boxes in Figure I are additional menu costs related to the extra
steps taken in these stores to make sure the tag and sign changes
have been done correctly.13
Table II lists each stage of the price change process, the total
amount of time spent on each stage each week on average, and
the number of tasks performed. In addition, the table identies
some of the main tasks performed in each stage as well as the
four most time-consuming tasks in each stage. To compute the
total labor time used in changing prices on a weekly basis, we
combine the data collected through in-store time and motion ob-
servations with information on the volume of products for which
prices are changed. These weekly hours are multiplied by the
wage rates (adjusted for fringe benets) of the employees used in
the price change process to get the total costs of labor required to
change prices.
For the four supermarket chains in our study, the total an-
nual labor cost of changing the shelf price tags ranges from
$40,027 to $61,414 per store, for an average of $52,084 (see the
rst row in Table III, making up about 49 percent of the total
menu costs on average. The labor cost of changing the price signs
range from $16,411 to $27,955 per store, for an average of
$22,183 (see the second row in Table III), making up almost 21
percent of the menu costs on average. Thus, for the four super-
market chains the total annual menu costs associated with the
labor required to change prices (shelf price tags and price signs,
combined) range from $62,210 to $81,703 per store, for an annual
average of $74,267. This is the single largest component of the
menu costs we report in this study, making up about 70.1 percent
of the total menu costs for these chains on average. This should
not be surprising, given that the most signicant portion of retail
are longer because they are in less standard locations, and (ii) there are fewer
sign changes than standard shelf price tag changes.
13. The menu cost measures we report do not include the cost of changing
prices in cases where items are moved from shelf to shelf, or where shelf space is
reallocated by increasing the shelf space for some products at the expense of oth-
ers. However, they do include the cost of pricing new products when they are rst
introduced. While this could bias the menu cost measures upward since it really
captures the cost of pricing rather than the cost of changing price, the size of this
bias is marginal due to the small number of new products. For example, according
to ESL company executives, the number of new products introduced at these
chains each week ranges from 20 to 100 approximately. In comparison to the num-
ber of products for which prices are changed each week (3223–4316), the bias
is negligible.
QUARTERLY JOURNAL OF ECONOMICS800
TABLE II
STAGE S OF PR ICE CHA NG E PROC ESS , TIM E SPEN T ON EAC H STAG E EACH WE EK, AN D THE MAIN TASK S PERF OR MED AT EACH STAG E AT CHA IN A
Time spent on each Number of Most time-consuming tasks and their
stage (in seconds) and tasks in share in the total time spent on the stage
Stage its share in the total stage Main tasks performed in each stage (in percents)
Shelf price tag 21,682.4 11 Receive tags, sort by grocery/produce/ Sort by department 29.39
change 4.63% general merchandise, distribute to Distribute to departments 6.89
preparation departments for night crew, sort by Sort by effective date 10.63
effective date, sort by aisle, separate Sort and separate by aisle 39.18
by aisle
Price tag 142,492.8 32 Select and locate aisles, sort by Locate item 48.33
change 30.44% subcommodities, select and locate Compare item UPC Code 15.97
process subcommodities, select and read Remove old price tag 6.71
tags, locate items, compare UPC info Install new price tag 8.72
(code, quantity, size, price), note all
mismatches, remove old tag, put new
tag, repeat the process for all
products at all locations
Price tag 142,737.3 26 Sort by aisle and subcommodity, go to Read item from report 10.57
change 30.49% aisle, read item from report, locate Locate item on shelf 53.37
verication item on the shelf, locate price tag, Locate the price tag 5.89
compare prices, compare effective Compare prices 14.88
dates, check off on report, note
mismatches (printed, handwritten, or
DSD tags), mark report to order
missing tags
TABLE II
CONT INU ED
Time spent on each Number of Most time-consuming tasks and their
stage (in seconds) and tasks in share in the total time spent on the stage
Stage its share in the total stage Main tasks performed in each stage (in percents)
Price sign 1,422.9 10 Receive signs, sort by grocery/ Sort by department 48.07
change 0.30% produce/general merchandise, Distribute to departments 8.01
preparation distribute to departments for night Sort by effective date 8.18
crew, sort by effective date, sort by Sort and separate by aisle 14.32
aisle, separate by aisle
Handmade 75,171.6 20 Go to end of aisle, note items on Note items on display and price 18.11
price sign 16.06% display and price, go to aisle where Go to aisle with display items 13.61
change display item is shelved, locate item, Locate item on the shelf 18.11
process compare the tag and display price, Prepare new signs and discard old 26.44
note mismatch, remove sign with
wrong price, prepare new sign and
discard old, install new sign, repeat
Preprinted 32,385.6 20 Get signs, go to aisle, locate existing Locate existing signs 10.23
price sign 6.92% sign, check effective date, compare Locate other old signs 9.40
change tag and sign price, remove old sign Install new signs 45.32
process (tear in half), install new sign, Compare ad and shelf price tag 9.14
compare tag and sign price, locate
item with new sign, note items not
found, repeat, get copy of ad,
compare ad and shelf prices, note
mismatches, repeat
Price sign 16,194.0 16 Get weekly advertisement insert, go Note items on diplay and price 42.27
change 3.46% to item displays, check whether they Compare ad and display prices 5.80
verication are advertised, compare prices, Locate item on the shelf 21.82
correct mismatches, go to the aisle Compare tag and display price 5.37
where product is shelved, locate item,
compare tag and display prices,
remove wrong sign, prepare new
sign, install new sign, repeat
In-store 26,181.8 29 Look up on system, check Look up on system 12.03
resolution of 5.59% authorization/tag/sign, discard wrong Locate tag or sign or both 22.69
problems tag/sign, nd/make and install Install tag or sign or both 11.34
occurring in correct tag/sign, email to CSC/ZSC, Make corrections as needed 14.09
the price make corrections (Specics depend
change on the type of problem, e.g., missing
process items/tags, mismatch between shelf
and sign prices or between UPC info
and shelf tag.)
TABLE II
CONT INU ED
Time spent on each Number of Most time-consuming tasks and their
stage (in seconds) and tasks in share in the total time spent on the stage
Stage its share in the total stage Main tasks performed in each stage (in percents)
Zone and 820.5 20 Determine whether it is a store error, Email from SSC and corrections 43.88
corporate 0.17% communicate to ZSC via email, Consolidate from zone 43.88
resolution of consolidate from all zones, Communicate to SSC via email 7.50
problems communicate to SSC and price Inform SSC about the corrections 2.93
occurring in integrity via email, determine
the price whether it is zone error, determine
change the required correction, communicate
process to CSC and ZSC, resolve the problem
Price 9,007.6 12 Customer notes price mistake, Customer tells cashier tag price 17.41
discrepancy 1.92% cashier veries the mistake and Cashier offers one item free 7.84
and scan offers the lower price (or one item Cashier lls price discrepancy form 13.06
guarantee/ free if the lower price is not accepted SSC researches and corrects 52.10
refund process by the customer), cashier completes
price discrepancy form, SSC
researches and corrects the mistake
(on the shelf or scanner database or
both)
CSC, ZS C, and S SC stand for Corporat e Scan Co ordina tor, Zone Scan Coordinat or, and Store Scan Coordi nator, respec tively.
For a more de tailed discu ssion of th e price chang e process, s ee [Levy, Bergen, Du tta, and Venable 199 7].
TABLE III
ESTIM ATE S O F THE ANNUA L MENU COS TS P ER STO RE FO R EAC H CHAI N (IN 1991–1992 D OLL ARS )
Chain Chain Chain Chain Average of Chain E
Menu cost component A B C D chains A–D (item pricing law)
Labor cost of price changes 61,414 53,149 40,027 53,748 52,084 52,944
(49.2%)
Labor cost of sign changesa16,411 22,183 22,183 27,955 22,183 22,183
(20.9%)
Costs of printing and 4,110 10,018 3,048 6,879 6,014 7,644
delivering price tags (5.7%)
Mistake costsb19,135 20,593 20,692 20,140 20,140 20,799
(19.0%)
In-store supervision costsc4,241 6,692 5,466 5,466 5,466 5,466
(5.2%)
Total annual menu cost 105,311 112,635 91,416 114,188 105,887 109,036
per store (100%)
a. The labor co sts of sign cha nges wer e not report ed for Chains B , C, and E, an d so we use inste ad the avera ge of Chains A and D.
b. The mista ke costs wer e not report ed for Chain D , and so we use in stead the av erage mi stake costs o f Chains A, B, and C .
c. The in-sto re supervi sion costs we re not repor ted for Chain s C, D, and E , and so we use ins tead the aver age of Cha ins A and B.
grocery operating expenses is labor costs [Hoch, Dre
`ze, and
Purk 1994].1 4
III.2. Costs of Printing and Delivering New Price Tags
There are direct costs associated with printing and deliv-
ering the price and sign tags. The order must be recorded and
processed at the chain, sent to the printer, recorded and pro-
cessed at the printer, printed, packaged, and then delivered to
each store. The cost per tag is usually quite low, $0.017 per tag
at Chain A, which includes stock costs of $0.0118 per tag, impres-
sion and data center operator costs of $0.0037 per tag, and mail
room handling costs of $0.0010 per tag. There are, however, many
price changes undertaken each week. In total, the costs of print-
ing and delivering the price and sign tags range from $3,048 to
$10,018, averaging $6,014, per store per year (see Table III).
These costs comprise less than 6 percent of the total menu costs
we report.
III.3. Costs of Mistakes Made in the Process of Changing Prices
Despite the labor put into checking to make sure that the
price changes are done correctly, there are still many price mis-
takes that are not caught until customers discover them through-
out the week, and these mistakes impose costs on the chain.
Clearly, the costs associated with these errors must be considered
when deciding whether to change prices or not, and therefore are
a relevant dimension of menu costs. These mistakes can occur so
often that they were a feature of a Dateline segment on U. S.
supermarket chains [NBC, April 1992] and an article in Money
Magazine [April 1993]. Both the Money Magazine article and
Goodstein [1994] report that on average 10 percent of the prod-
ucts they examined had price mistakes. A more recent study by
the Federal Trade Commission [1996] reports a total error rate of
about 5 percent.
The menu costs associated with these mistakes include lost
14. Our measure of labor cost may overstate the true costs of changing prices
if supermarkets hoard labor to save hiring and ring costs. However, this is not
likely to be the case for several reasons. First, the labor costs of changing prices
we report are based on actual measurements of the minimum amount of time and
labor required to accomplish the task rather than on the number of employees
hired to change prices at the store. Second, the adjustment in the amount of labor
is usually done through hours worked, which makes cost of hiring and ring less
relevant. And third, the workers on the oor are routinely moved from task to
task according to the need. These tasks include stocking, cleaning, price changing,
customer service, etc. The workers employed by supermarket chains are always
busy, and so the opportunity cost of changing price is not zero. Therefore, labor
hoarding is not likely to be an important factor in our measurements.
QUARTERLY JOURNAL OF ECONOMICS806
cashier time to correct the errors, scan guarantee refunds, and
inventory mistakes associated with incorrect price tags.15 Lost
cashier time is measured here in terms of wage payments. Scan
guarantee refunds are additional price reductions beyond the er-
ror, or additional items given away for free because of the mis-
take. Finally, the inventory mistakes costs we report include only
the cost of stockouts, which occur when shelf price is lower than
intended.
The mistake costs were available at Chains A, C, and D, and
they range from $19,135 to $20,692 for an average of $20,140 per
store annually (see Table III). These costs are the second largest
component of menu costs in our study, comprising about 19 per-
cent of the total.
III.4. Costs of In-Store Supervision Time Spent on Implementing
Price Changes
Managers at the store level spend time overseeing, imple-
menting, and troubleshooting the price change process. Only
Chains A and B had a measure of the menu costs associated with
this in-store supervision time, and both of these came from a self-
reported number of hours spent on changing prices by the manag-
ers at these chains. The hours spent on changing prices were the
same across the chains, approximately ve hours per week. Thus,
the menu costs for in-store supervision time came to $4241 and
$6692 per store annually for Chains A and B, respectively (see
Table III). These costs comprise less than 6 percent of the total
menu costs we report in this paper. However, notice that these
measures do not include the cost of the management time spent
on price change decisions made at corporate headquarters, which
is discussed next.
III.5. Components of Menu Costs We Are Unable to Measure in
Dollar Terms
Our data set does not contain the exact dollar measures of
some menu cost components. One such component is the cost of
corporate management time spent on price change decisions.16 In
15. Other likely costs of price mistakes that we do not consider explicitly
because we are unable to measure them in dollar terms are legal problems (when
the scanner price is higher than the shelf price), loss in customer goodwill, and
decreased protability (when the scanner price is lower than the shelf price).
16. It has been suggested that the cost of managerial decisions is one of the
most important components of menu cost. See, for example, Ball and Mankiw
[1994], Kashyap [1995], and Meltzer [1995]. Since the ESL system was not de-
THE MAGNITUDE OF MENU COSTS 807
the supermarket chains we study, prices are generally set at cor-
porate headquarters in a weekly meeting where the manager in
charge of setting prices looks at a variety of information including
(a) any manufacturer wholesale price changes, promotions, and
other related issues; (b) past sales for this product; and (c) com-
petitors’ prices. Based on this information and on discussions
with other managers, the price-setting manager decides whether
to change prices and, if so, by how much.
To estimate the magnitude of these managerial components
of the menu costs, consider the following. In an average chain
there is at least one executive of merchandising, who devotes
most of his/her time to pricing decisions. In addition, there are
up to three senior managers who would deal with pricing and
to whom category managers report. There are also ten-to-twelve
category managers who are responsible for setting prices on all
the products within their category. An additional two-to-four
people spend full time handling the implementation of price
changes across retail outlets, coordinating the printing and deliv-
ery of price tags, and handling pricing problems in the system.
Another ve-to-seven workers gather the data on competitors’
prices and analyse both the competitors’ data and the store’s own
scanner data to put it in a form useable by managers making
pricing decisions. Thus, in total there are about 21–27 people
working at the corporate headquarters on price change decisions.
Assuming $150,000 as the average annual salary of the executive
of merchandising and senior managers, $100,000 for category
managers, and $50,000 for the rest, the chainwide managerial
cost falls in the neighborhood of $2.3–$2.9 million a year, which
seems a substantial amount. However, note that these pricing de-
cision are made for the entire chain, and therefore, the costs per
store are signicantly less, especially for the larger chains. For
example, using $2.9 million as the upper bound, the additional
annual menu cost per store for Chains A–D, which on average
operate about 400 stores each, averages about $7250, which is
much lower than expected, and is due to the centralization of the
price change decisions in the chains we study.17
signed to save the costs of corporate headquarter managerial time spent on price
change decisions, the ESL company did not measure this component of menu
costs. The estimates reported in this section are based on the information received
from the ESL company executives.
17. A decentralization of the price change process, say, by allowing the store-
level managers to make price change decisions, can change these gures tremen-
dously. For example, consider the following thought experiment conducted using
QUARTERLY JOURNAL OF ECONOMICS808
Our menu cost measures also do not include the cost of
changing prices of direct store delivery (DSD) products. These
products are almost completely handled by manufacturers, in-
cluding stocking, monitoring inventories, and setting and chang-
ing prices.1 8 We have data on the weekly frequency of price
changes of DSD products in Chain E. In an average week there
are 174 price changes of DSD products, which is about 10 percent
of the supermarket’s total weekly price changes. Using the cost
of changing the price of a regular product, $1.33 (see Section IV
for details), the annual cost of changing prices of the DSD prod-
ucts in this chain roughly equals $12,034.19 Our menu cost mea-
sures do not include these gures since we do not have similar
data for the other chains.20
III.6. Total Menu Costs
The total annual menu costs reported for each chain per
store are listed in the last row of Table III. As the table indicates,
the menu costs range from $91,416 to $114,188 for an average of
$105,887 per store per year.21 Note that these menu cost mea-
the average annual per store gures for Chains A–D. Suppose that the supermar-
ket chains decentralize the price change process by hiring for each store only one-
quarter of the price change managing team, while, at the same time, they com-
pletely eliminate the corporate level team. The resulting annual menu cost per
store would be $830,887 (5$105,887 1$725,000), which would dwarf any of the
measurable menu cost gures we report in this study. Even if the average store
only hired just the merchandising manager at the annual cost of $150,000, it
would still incur annual managerial cost of about $255,887 (5$105,887 1
$150,000). In other words, such a trivial decentralization would double the store-
level menu costs. This would indeed make the cost of price change decisions, the
most important component of menu cost.
18. DSD products usually are high-volume, fast-moving, or perishable prod-
ucts such as milk, soda, eggs, bread, dairy, snacks, etc. In the chains we study,
about 10–20 percent of the products are of a DSD type, but that share may reach
as much as 40 percent of the products carried [Direct Store Delivery Work Group
et al. 1995].
19. The process of changing prices of DSD and of regular products is similar.
But with DSD products there are additional costs of the time spent on driving to
the store, parking, and setting up the price change process at each store.
20. Our measures of menu cost also do not incorporate the cost of informing
consumers about price changes, which can take a variety of forms such as newspa-
per ads and inserts, TV and radio ads, in-store promotion signs, etc. Finally, we
have no data on lost customer goodwill and damaged reputation caused by dis-
crepancies between price tag and cash register [Okun 1981; Carlton and Perloff
1994; Haddock and McChesney 1994].
21. The variation in the menu costs across the chains is mostly due to wage
rate and labor-efciency variations. Also note that since the supermarket chains
in our sample are similar in the size of their stores, carry similar sets of products,
and follow similar processes of price change and price change decisions, it is rea-
sonable to believe that the chains incur similar types of costs. Therefore, as noted
underneath Table III, these menu cost measures are computed by replacing the
unreported gures by the averages of the available values from the other chains.
THE MAGNITUDE OF MENU COSTS 809
sures include only the components we could accurately measure
in dollar terms, which are discussed in subsections III.1–III.4.
IV. ITEM PRICING LAW S AN D MENU COSTS
In this section we provide evidence on the menu costs for an
additional chain (Chain E), which unlike the other four chains,
operates in a state with an item pricing law. The most important
aspect of item pricing laws is that they require a price tag on each
individual item sold, not just on the shelf, which is what the other
four chains in our sample do. For example, the item pricing law
in Connecticut requires that the grocers “shall mark or cause to
be marked each consumer commodity which bears a Universal
Product Code with its retail price.”2 2 From a menu cost perspec-
tive, the requirement of posting prices on every item (in addition
to the shelf price tag) introduces additional costs in the process
of changing prices.
Although most of the steps involved in changing prices are
the same for both types of chains, stores that are subject to item
pricing laws have to undertake additional steps to obey this law.23
The labor cost component of menu costs in Chain E totals $75,127
a year, of which $49,710 is the cost of the labor time spent on
changing the prices of individual items, $3,234 is the cost of the
labor time spent on shelf tag replacements, and $22,183 is the
cost of the labor time spent on sign changes (see Table III).2 4 An
additional $44,168 is spent annually putting prices on new items
as they are brought to the shelves. Although we do not include
this last gure in our menu cost measures because we do not have
information on how much of it is due to price change activity and
how much due to just pricing—these costs are clearly a direct
consequence of the item pricing law. The printing and delivery
cost of price tags and price signs are $7,644, and the mistake
22. Public Act No. 75–391: An Act Concerning Pricing of Consumer Merchan-
dise [Public Acts of the State of Connecticut, 1975, Vol. 1, p. 390].
23. These steps, which are in addition to the regular steps undertaken to
replace price tags on the shelves, include (1) obtaining item price tags, (2) setting
up workstations, (3) locating the product, (4) removing an item from the shelf, (5)
removing old price tag, (6) setting marking gun, (7) applying new price tag, and
(8) returning the item back to the shelf.
24. Since we do not have a measure of the cost of labor time spent on sign
changes and the cost of in-store managerial supervision time for this chain, we
use the average of the chains that report them (A and D). Note also that the
hourly wage rate of $9.07 paid by Chain E is lower than the hourly wage of about
$14.00–$20.00 paid by Chains A–D.
QUARTERLY JOURNAL OF ECONOMICS810
25. Further, note that the chains with smaller menu costs are likely to
change their prices more frequently which suggests that the gures of the total
annual menu costs understate the differences between Chain E and the other
chains. Indeed, despite the large difference in the menu cost per price change, the
total annual menu costs per store for Chain E ($109,036) are more comparable to
those of Chains A–D ($105,887).
26. In calculations that follow, we use industry averages because (1) the
chains did not share this proprietary information with us, and (2) we were re-
quired to keep the identity of these chains condential, as some of these numbers
are detailed enough to enable some readers to identify the chains under study.
costs are $20,799. These gures, along with the amount of $5,466
for the cost of in-store managerial supervision time, yield total
annual menu costs of $109,036 per store.
Although the magnitude of the total annual menu costs seem
similar to the other four chains, note that the average weekly
frequency of price changes in Chain E is only 1578, which is only
40.3 (51578/3916) percent of the price changes made by the
other four chains. Thus, the average menu cost per price change
for Chain E is $1.33 (see Table IV, last row). In contrast, the corre-
sponding gures for Chains A–D average $0.52. Hence, the menu
costs per price change incurred by the supermarket chain facing
item pricing laws are more than two and a half times the amount
incurred by chains that are not subject to this law.25 Overall,
these ndings suggest that legal restrictions of the type of item
pricing laws can have a signicant impact on the menu costs in-
curred by sellers.
V. SIGN IF IC ANC E OF T HE MENU COSTS
The next natural question to ask is, how important are these
costs? To address this question, we (1) provide several relative
measures of the menu costs, (2) discuss the effect of the menu
costs on supermarkets’ price change activity, and (3) discuss mac-
roeconomic implications by relating our ndings to the existing
theoretical models of menu costs. In each case, we provide addi-
tional evidence to help assess the importance of these menu costs.
V.1. Relative Measures of the Menu Costs
In order to assess the relative magnitude of the menu costs
reported in Section IV, we now present the menu cost gures rela-
tive to the average store-level revenues and net prot margins.2 6
In addition, we present the menu cost gures per price change.
The annual average revenues of a large U. S. supermarket
chain of the type and size included in our sample is $15,052,716
THE MAGNITUDE OF MENU COSTS 811
TABLE IV
RELAT IVE ME ASUR ES O F MEN U COSTS P ER STO RE FOR EA CH CHA IN (IN 1991–1992 DO LLA RS OR IN PE RCE NT)
Relative measure of Chain Chain Chain Chain Average of Chain E
menu costs A B C D chains A–D (item pricing law)
Total annual menu cost ($) 105,311 112,635 91,416 114,188 105,887 109,036
MC/revenuesa(%) 0.70 0.75 0.61 0.76 0.70 0.72
MC/operating expensesb(%) 3.11 3.32 2.70 3.37 3.13 3.22
MC/gross marginc(%) 2.80 2.99 2.43 3.03 2.81 2.90
MC/net margind(%) 35.0 37.4 30.4 37.9 35.2 36.2
MC per product carriede($) 4.21 4.50 3.66 4.57 4.23 4.36
MC per item soldf($) 0.0119 0.0127 0.0103 0.0129 0.0119 0.0123
MC per price changeg($) 0.47 0.50 0.46 0.68 0.52 1.33
The notes be low provi de the gures u sed in comp utation s. MC stands f or total ann ual menu cos t. See text fo r more detai ls.
a. The annua l revenue s are $15,05 2,716 per sto re on averag e [Superm arket B usiness 1993, p. 52].
b. The annua l operatin g expense s are $3,386 ,861 per stor e on average , based on 2 2.5 percent o f revenues [H och, Dre
`ze, and Pu rk 1994] .
c. The an nual gros s margin is $3,763,1 79 per st ore on ave rage, ba sed on 2 5 percen t of reven ues [Hoc h, Dre`ze , and Pur k 1994; S uperma rket Busi ness 1993].
d. The annua l net margin is $301 ,054 per store on a verage, ba sed on 2 percent of rev enues [Mo ntgomery 1 994].
e. MC per pro duct carrie d is compu ted as a ratio MC t o the averag e number of p roducts car ried per sto re (25,000 ).
f. MC per item sold is com puted as the ratio of M C/(reven ue/avera ge price per item so ld). The avera ge price per item sold is $1 .70. See note a above fo r revenue inf ormation . Note
the differe nce between num ber of prod ucts carried and n umber of i tems sol d. As an examp le, a Tartar Con trol Cres t, 8oz. wou ld be cons idered a pr oduct ca rried and 3 00 units of t hem
sold per year wo uld be consi dered numb er of items so ld.
g. MC per pric e change is c omputed as ( MC/52)/(n umber of pr ice change s/week), where num ber of price cha nges/wee k is taken from Table I.
per store.27 According to the second row of Table IV, the ratio of
menu costs to revenues for Chains A–D ranges between 0.61–0.76
percent averaging 0.70 percent.2 8 We relate the size of these
gures to the existing theoretical menu cost models in sub-
section V.3.
Net prot margin, which measures the revenues minus all
costs, is approximately 1–3 percent of revenues for these chains
[Montgomery 1994], so we use 2 percent as a working average.
The reason for the low prot rate in this industry is the intense
competition [Calatone et al. 1989], especially at the regional level
[Chevalier 1995], which has been increasing since the early 1990s
[Progressive Grocer, November 1992, p. 50]. It follows that the
average store protability for these chains equals $301,054 per
year. Therefore, the ratio of total menu cost to net margin for
Chains A–D ranges between 30.4–37.9 percent for an average of
35.2 percent. Thus, the menu costs we report in this study repre-
sent a signicant share of supermarkets’ prots.
Another way to look at the menu cost gures we report is to
express them relative to the frequency of price changes. In the
last row of Table IV we present the menu cost gures per price
change for each chain. As the table indicates, the cost of changing
a price in Chains A–D ranges betw een $0.46–$0.68 for an average
of $0.52. For Chain E the gure is substantially larger, $1.33 per
price change.2 9 These gures are lower than the estimated cost of
27. This is the average of two different estimates, $12,945,432 and
$17,160,000. The source of the rst gure is internal record of a supermarket
chain of the type and size studied here. The second gure comes from Supermar-
ket Business [1993, p. 52].
28. We also measured the menu costs in terms of controllable operating ex-
penses (which are the portion of costs that the retailer has direct control over and
therefore are often the costs that the retailer is most focused on managing), and
gross margins (which measure the supermarket revenues minus direct cost of the
products it sells). We nd that the menu costs comprise 3.13 percent of controlla-
ble operating expenses and 2.81 percent of gross margins at these chains, on aver-
age. Finally, if we measure the menu costs relative to the number of products
carried per store (about 25,000), then we nd that the menu costs per product
average $4.23 for Chains A–D. See Table IV and its footnotes for details.
29. We can also try to express the menu cost gures relative to the number
of individual items sold by these chains each year. (Note the difference between
number of products carried and number of items sold. As an example, a Tartar
Control Crest, 8oz. would be considered a product carried and 300 units of them
sold per year would be considered number of items sold.) Using $1.70 as the aver-
age price of all the products sold, we nd that the menu cost per item sold for the
four chains is in the range of $0.0103–$0.0129 for an average of $0.0119 (see Table
IV, second to last row). To see the relative magnitude of these gures, note that
according to Berkowitz, Kerin, and Rudelius [1986, p. 319], the goal of the super-
market chains of the type we study, “. . . is to make 1 penny of prot on each dollar
of sales.” Thus, menu cost per item sold, when adjusted for the average price,
THE MAGNITUDE OF MENU COSTS 813
$2.00–$3.00 per price change reported by Slade [1996a]. There
are several possible reasons for this: (1) our menu cost gures are
based on actual measurements of the resources that go into the
price change process, whereas she estimates menu costs econo-
metrically as model coefcients using a mix of store-level price
and aggregate cost data; (2) we cover 25,000 products that the
supermarkets carry rather than a single product category; (3) our
menu cost gures do not include all components of menu costs;
and (4) there could be differences in wage rates that may be im-
portant given the signicance of the labor cost component in
menu costs.
V.2. The Effect of Menu Costs on the Price Change Activity of the
Supermarkets
In this section we present evidence which suggests that these
menu costs may be forming a barrier to price change activity. To
begin with, consider the effect of the item pricing law on the price
change activity of Chain E. The data on the weekly frequency of
price changes in each chain are displayed in the last two rows of
Table I. According to these gures, the average weekly frequency
of price changes in Chain E is only 1578. Thus, on average, Chain
E changes the prices of only 6.31 percent of its products each
week. In contrast, the average weekly frequency of price changes
at Chains A–D ranges from 3223 to 4316, for the four-chain aver-
age of 3916 price changes weekly. So, Chains A–D change prices
on 12.89 to 17.26 percent of their products each week, yielding a
four-chain average of 15.66 percent. Thus, Chain E, which faces
the item pricing law, changes prices only about one-third times
as frequently as do Chains A–D.30
Moreover, within Chain E there are 400 products that are
exempt from the item pricing law, and thereby face lower menu
costs. We nd that there are an average of 83 weekly price
changes for these products, yielding 21 percent of these products
changing prices. So within Chain E they change prices over three
times as frequently for products with lower menu costs than for
roughly equals one-half of their target net prot per item, which seems
substantial.
30. However, note that our comparison of the two types of chains may not be
completely ceteris paribus because these stores are located in different states and
therefore there may be other chain-specic factors (in addition to item pricing
laws) that distinguish these stores. We do not have any specic information on
these differences. We do know, however, that the stores in these chains are similar
in size and carry similar sets of products.
QUARTERLY JOURNAL OF ECONOMICS814
the products with higher menu costs. Note that this nding is on
the price change activity within the same chain offering almost a
natural experiment on the impact of menu costs on the chain’s
pricing behavior. Hence, we provide evidence, both across chains
as well as across products within a chain, that as the costs of
changing price go up, the frequency of price changes goes down.
Thus, the menu costs we nd are signicant enough to affect the
chain’s price change practice.
We also have additional evidence from Chains A, B, and D
about these menu costs being a barrier to certain price changes,
and it is summarized in Table V. According to the Price Manage-
ment Department of Chain A, the chain experiences cost in-
creases on 860 products in an average week, to which it would
like to react with a price increase.31 However, on average, 22 per-
cent of these price increases are not implemented immediately
because the cost of changing prices for these products is too high
to make it economically worthwhile. Figures of the same magni-
tude were reported by other chains. For example, Chain D experi-
ences cost increases for 961 products in an average week. Out of
these the chain adjusts prices of only 633 products. The re-
maining 34 percent of the prices are left unadjusted because of
the menu costs. Similarly, Chain B nds it economically ineffi-
cient to adjust prices of 508, i.e., 30 percent, of its products each
week because of menu costs. This provides additional evidence
that the menu costs incurred by these chains are preventing price
adjustments to some costs changes, leading to price rigidities of
the products involved.3 2 Note that, although we do not have simi-
lar data for Chain E, we would expect signicantly lower num-
bers on this measure at that chain. These gures also suggest an
upper bound on the benet of complete price exibility under the
current pricing practice of weekly price adjustments. However,
if new technologies (e.g., ESL systems) and new pricing prac-
tices (e.g., a decentralization of the price change decisions) are
31. Our data contain information only on the frequency of cost increases.
Although it is more than likely that the supermarkets are experiencing cost de-
creases as well, our data set contained no information on such decreases.
32. Menu costs may even be playing a role in the observed movement toward
pricing strategies that rely on fewer price changes, such as EDLP [Blattberg and
Neslin 1989; Lattin and Ortmeyer 1991; Marketing News, April 13, 1992, p. 8].
According to Progressive Grocer [November 1992, p. 50], “A growing number of
operators say they have switched from high-low pricing [to EDLP]. They cite the
inefciencies of making frequent price changes . . .” Similarly, Hoch, Dre
`ze, and
Purk [1994, p. 16], state that EDLP lowers operating costs by lowering “. . . in-
store labor costs because of less frequent changeovers in special displays.”
THE MAGNITUDE OF MENU COSTS 815
TABLE V
WEEK LY FREQUENCY OF COST-BASE D PRICE ADJUSTMENTS NOT IMPL EMENTED
BECAUSE OF ME NU CO STS
Chain Chain Chain
A B D
Number of products for 860 1693 961
which costs increase in an
average week
Number of price 671 1185 633
adjustments implemented (78%) (70%) (66%)
Number of price 189 508 328
adjustments not (22%) (30%) (34%)
implemented because of
menu costs
Chains C a nd E did no t report the se data.
adopted, allowing a fundamental change in the way the pricing
mechanism is currently set, the managers could consider more
frequent price change activity (e.g., multiple times each week) as
menu costs go down.
In this paper we measure the menu costs at the chains’ cur-
rent level of price change activity. It may be worthwhile to specu-
late on the shape of the cost function relating menu costs to the
frequency of price changes by assessing how these costs would
change if the price change activity were to increase or to decrease.
It seems likely that many of the costs we report in this paper will
(approximately) change linearly with additional price changes
within the current range of price changes the chains are under-
taking (plus or minus, perhaps, a thousand per week). For ex-
ample, the labor costs associated with changing a shelf price tag,
costs of verifying price changes, and the costs of mistakes oc-
curring during this process, all increase linearly with the fre-
quency of price changes. This is because most of the time-
consuming steps involved in the price change process must be
repeated each time an additional shelf price tag is changed (see
Table II). Further, we were unable to nd many tasks that gener-
ated signicant returns to scale. It is unclear what cost savings
are available if the price change activity drops substantially be-
QUARTERLY JOURNAL OF ECONOMICS816
low the levels it is at now. Clearly, if price changes were near
zero, or done less frequently than weekly (say monthly), there
could be major differences in these costs.
What is less clear is how these costs would change at more
extreme levels of price change activity. With less frequent price
changes, the menu costs could probably be reduced signicantly,
although the cost of deciding what prices to set initially, and the
cost of putting the initial shelf price tags would still remain as a
lower bound of the menu cost. However, for achieving more price
exibility by changing prices more frequently (i.e., multiple times
each week), substantial changes must be undertaken. At present,
the supermarket chains are set up to make the majority of their
price changes on a weekly basis, with the appropriate systems in
place to make this process most efcient. For example, in order
to save costs and to have higher quality price tags (e.g., with
color, more details, greater clarity, glossy, etc.), the chains often
send new price tag requests to a printing shop, which takes three
days to print and deliver the labels to each store. Then, given
the large number of price changes taking place, and the goals of
minimizing customer disruptions and labor costs (such as over-
time pay), and coordinating with advertised price promotions, the
prices are changed in the store over a two-to-three-day period (see
Table VI). The combination of these schedule and built-in lags is
acceptable under the current practice of changing prices weekly,
but would have to be adjusted dramatically to allow for signifi-
cantly more frequent price changes on a regular basis.
Perhaps even more imposing are the costs of changing the
managerial costs associated with the current weekly system of
price changes. The process of pricing at this organizational level
is not a self-contained activity taking place in isolation from other
operations of the supermarket management. Rather, it is a part
of a larger system of business decisions and operations. The cur-
rent process of operations (such as data collection and their
analysis, management meetings, coordination of the decisions
across functional areas, etc.) is set up to function on a weekly
basis.3 3 Further, these management, accounting, and logistics
systems are currently built around a tremendous amount of in-
33. For example, the data are analyzed and presented to managers on Mon-
day and Tuesday, with meetings set for Thursday and Friday to make pricing
decisions for the next week in coordination with all other business functions of
the chain.
THE MAGNITUDE OF MENU COSTS 817
TABLE VI
WEE KLY SCHEDULE OF PR ICE CH ANG ES B Y TYP E OF ME RCH AN DISE IN CHA IN A
Number of products for Time of the week when
Type of merchandise which prices change the prices are changed
General merchandise 72 Saturday night
advertised (1.7%)
Grocery 2100 Sunday night
(49.1%)
Market (produce) 171 Sunday night
(4.0%)
General 1853 Monday night
merchandise (43.3%)
Grocery, advertised 82 Tuesday night
(1.9%)
Total number of 4278
weekly price changes (100%)
formation to be analyzed for thousands of products.34 Accommo-
dating more frequent price changes on a regular basis would
require a radical adjustment of many managerial substructures
and units at both corporate and store levels, which could involve
costly investment in restructuring and retraining the existing la-
bor force as well as in new physical and human capital. Thus, the
cost function relating the menu costs to the frequency of price
changes would be approximately linear from zero to roughly
about 5000 price changes per week. With higher frequency of
price changes, under the current weekly pricing practice, the
menu costs are likely to increase dramatically, perhaps by as
much as ten-to-twenty times, according to the ESL executives.35
34. For example, under the current system, a chainwide category manager
operating at the corporate headquarters needs to study and assess numerous
pieces of detailed information such as competitors’ price and sale information from
the last week, the past week’s sales at the own chain, manufacturer/supplier pro-
motions, wholesale price reductions, coop allowances, new product offerings, shelf
space decisions, coordination with newspaper advertising, logistics at the ware-
houses as well as at each store, store differences in terms of customer characteris-
tics, and competitive environments, product/shelf selection, and layout, etc.
35. If the supermarket chains indeed restructure the entire price change pro-
cess and begin to change prices much more frequently (say two-to-three times a
week) on a regular basis, then the shape of this cost function could change in an
unpredictable way.
QUARTERLY JOURNAL OF ECONOMICS818
V.3. Relating Our Findings to the Existing Theoretical Models of
Menu Costs
In order to assess the magnitude of these menu cost gures
in the context of the existing theoretical menu cost literature,
consider the following calculation experiments done within the
framework of two theoretical menu cost models. Blanchard and
Kiyotaki [1987] study a general equilibrium menu cost model
with monopolistic competition and with unit elasticity of aggre-
gate demand with respect to real money balances. According to
their calculations, menu costs of the magnitude of 0.08 percent of
revenues, which they consider “very small,” may be sufcient to
prevent adjustment of prices. Ball and Romer [1990] conduct
similar calculations in the framework of a model with imperfect
competition and menu costs. They nd that for plausible markup
and labor elasticity parameter values, menu costs needed to pre-
vent price adjustment are 0.70 percent of revenues, which as they
suggest, are nonnegligible. For smaller menu costs, e.g., 0.04 per-
cent of the revenue, which Ball and Romer consider “trivial,” im-
plausibly large values of markup and labor elasticity parameters
are needed to prevent price adjustment to monetary shocks.
According to the gures in Table IV, the reported menu cost
to revenues ratio for Chains A–D averages 0.70 percent, ranging
from 0.61 percent to 0.76 percent. These are signicantly larger
than the “trivial” 0.04 or 0.08 percent gures mentioned above,
suggesting that the menu cost gures we nd here are nontrivial.
Further, under the model and parameter values considered by
Blanchard and Kiyotaki [1987], the menu cost gures we nd are
higher than the theoretical minimum needed to form a barrier to
price adjustments. Under the model and parameter values con-
sidered by Ball and Romer [1990], the reported menu cost/reve-
nue ratio for all but one chain reaches or crosses the theoretical
threshold of 0.70 needed to form a barrier to price adjustments.
The existence of numerous unmeasured menu cost components
discussed in subsection III.5 also raises the possibility that the
actual menu costs incurred by these chains are signicantly
higher than that threshold. This suggests that the menu costs we
report may be large enough to form a barrier to nominal price
adjustments, when interpreted in the context of these models.
An issue of interest in this literature is time-dependent ver-
sus state-dependent pricing rules (see, for example, Caplin and
Leahy [1991]). The evidence from our data set on the timing of
THE MAGNITUDE OF MENU COSTS 819
price changes suggests that the price change decisions in these
supermarkets have a strong time-dependent price-setting ele-
ment.36 For example, according to Table VI, the prices in Chain A
are changed weekly according to the following schedule: the price
changes of general merchandise that is advertised is done Satur-
day nights; grocery and produce prices are changed Sunday
nights; the rest of the general merchandise prices are changed on
Monday nights; and the prices of advertised grocery items are
changed on Tuesday nights. Thus, as the gures in Table VI indi-
cate, over 96 percent of the price changes are done during Sunday
and Monday nights. However, this does not imply that state-
dependent pricing rules are unimportant. Even if price changes
across product categories follow a prescheduled weekly time ta-
ble, the prices of which products to change is likely to be a state-
dependent decision. For example, it could depend on changes in
supply and demand conditions such as competitors’ price change
decisions. Indeed, Levy, Dutta, and Bergen [1996] use retail
store-level orange juice price and cost data to demonstrate that
the extent of price response to cost shocks, that is, the extent of
price rigidity, may depend on the nature of supply shocks.3 7
We do not want to overstate the usefulness of our data for
directly addressing the issue of monetary nonneutrality. On one
hand, authors such as Caplin and Spulber [1987] have demon-
strated that under certain conditions individual price rigidity
may not be sufcient for aggregate price rigidity, but unfortu-
nately, our data do not speak directly to this issue.38 On the other
hand, authors such as Akerlof and Yellen [1985], Mankiw [1985],
Parkin, [1986], and Caplin and Leahy [1997] have shown that even
36. Danziger [1983], Caballero [1989], and Ball and Mankiw [1994] suggest
that time-dependent price adjustment of the type documented here can be optimal
if the cost of gathering information about the state exceeds the cost of making the
price adjustment itself.
37. We also considered the possibility of convexities in the cost of changing
prices. Our data do not suggest many convexities since the labor time spent in
the price tag change process, the cost of printing and delivering price tags, and
in-store supervision time do not change with the size of a price change. The only
measurable component of menu costs that could be convex is the cost of mistakes
made: the larger the price change, the higher the probability of a customer notic-
ing the mistake, and the larger the amount required to be refunded as compensa-
tion. Among the unmeasured components of menu cost, the cost of corporate
managerial time may increase with the size of a price change because larger price
changes may require more serious consideration.
38. Also see Balke and Wynne [1996] and Bryan and Cecchetti [1996]. Since
we do not have measures of how menu costs change over time, our data also have
little to say about time variation in menu costs or about the relationship between
menu costs and ination, which during the period of the data collection (1991–
1992) averaged about 3 percent annually.
QUARTERLY JOURNAL OF ECONOMICS820
small menu costs can be relevant since they may be sufcient to
generate substantial aggregate nominal rigidity and thus large
business cycles. Therefore, as Blinder [1994], Kashyap [1995],
and Slade [1996a] emphasize, it is important to search for direct
evidence that such costs are indeed present at the micro level. By
directly identifying, documenting, and measuring the magnitude
of menu costs at the store level, we are taking an important step
in that direction.
VI. CON CL USION A ND FUTURE RESEARCH
Our main contribution is that we provide direct microeco-
nomic evidence on the actual magnitude of menu costs for four
large U. S. retail supermarket chains. The annual menu costs per
store at these chains average $105,887, comprising 0.70 percent
of revenues, 35.2 percent of net prot margins, and $0.52 per
price change, on average.
Further, we provide evidence which suggests that these
menu costs may be forming a barrier to price changes. Specifi-
cally, we show that (1) supermarket chains not subject to item
pricing law change prices two and a half times more frequently
than the chain that is subject to the law; (2) within the chain that
is subject to the item pricing law, they change prices over three
times as frequently for products that are exempt from this law
than for the products which are subject to this law; and (3) we
nd that these chains do not adjust prices of up to one-third of
the products for which they face cost increases because of menu
cost considerations.
When we relate these ndings to the existing theoretical
models of menu costs, we conclude that the magnitude of menu
costs we nd is large enough to be capable of having macroeco-
nomic signicance. Specically, when considered in the context of
the theoretical menu cost models of Blanchard and Kiyotaki
[1987] and Ball and Romer [1990], we nd that the menu cost
gures we report are “nontrivial” and their relative magnitudes
cross the minimum theoretical threshold needed to form a barrier
to price adjustments.
Despite the high relative magnitude of the marginal cost of
changing price that we found, the data still indicate frequent
weekly price changes. This is because of the high marginal bene-
t of changing price, which is due to the erce competition found
in the retail supermarket industry. That marginal benets may
THE MAGNITUDE OF MENU COSTS 821
outweigh the marginal costs of changing prices in this industry,
however, does not rule out the possibility that menu costs of the
magnitude we nd here can create substantial nominal rigidity
in other industries or markets. In less competitive industries and
markets, menu costs of the type and magnitude we document
here are likely to have a bigger impact on the frequency of price
adjustment and, consequently, on the degree of price rigidity.
At a minimum the direct dollar measures of menu costs we
report here can be used as a starting point for future research on
measuring their magnitude in other industries and establish-
ments. We anticipate that these menu costs will be similar in
other markets which rely on posted prices (such as drugstores,
department stores, etc.) because the steps involved in the price
change process are likely to be similar. What may differ are the
frequency of price changes and the labor wage rates at these
stores. For example, since supermarket chains change thousands
of prices each week, the total annual menu costs incurred by
these chains per store are likely to be high in comparison to other
retail formats such as chain drugstores or department stores.
There are, however, a variety of industries for which the steps
involved in changing prices would be signicantly different from
those reported in our study. For example, business-to-business
sales which often rely on a sales force, will require changes in the
list price sheets, changes in the instructions to the sales force
which may include education and discussion with the salespeople
in the company, and so forth. These business-to-busines s prices
also often have more complex pricing schemes including quantity
discounts, bundling, and individually negotiated prices. As an-
other example, the composition of the cost of changing the news-
stand prices of magazines [Cecchetti 1986] or the prices of
products sold through catalogs [Kashyap 1995] are different from
many of the menu cost components we discuss here. Further, the
nding that a centralization of pricing decisions makes the store-
level managerial component of menu cost relatively small, sug-
gests that the managerial menu costs likely are highest in
settings where price change decision s are decentralized. Thus, fu-
ture empirical work should look at menu cost and its composition
in a variety of other industries, markets, and products, with both
centralized as well as decentralized price change decisions, in or-
der to see whether the magnitude of these costs can be general-
ized and benchmarks can be established. Further, there are
technological changes taking place in this and other industries
QUARTERLY JOURNAL OF ECONOMICS822
that promise to alter the structure of menu costs, which deserve
attention. At the theoretical level our ndings suggest that it may
be worthwhile to explore models which incorporate the idea of
item pricing laws as an additional component of menu costs.
EMORY UNIVE RS ITY
UNIVE RS ITY OF MIN NE SOTA
UNIVE RS ITY OF SOUTHE RN CAL IFOR NIA
ROBERT W. BAIRD & COMPANY
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