The Relation between Inventory Investment and Price Dynamics in a Distributive Firm
In this paper, we examine the role of inventory in the price-setting behavior of a distributive firm. Empirically, we show the 5 empirical facts relating to pricing behavior and selling quantity of a certain consumer goods based on daily scanner data to examine the relation between store properties and pricing behavior. These results denote that price stickiness varies by the retailers’ characteristics. We consider that the hidden mechanism of price stickiness comes from the retailer’s policy for inventory investment. A partial equilibrium model of the retailer’s optimization behavior with inventory is constructed so as to replicate the five empirical facts. The results of the numerical experiments in the constructed model suggest that price change frequency depends on the retailer’s order cost, storage cost, and menu cost, not on the price elasticity of demand.
Price stickiness is one of the most important and controversial concepts in macroeconomics. Many macroeconomists consider it as a key concept of the real effect of monetary policy in a macroeconomic model. So far, they have turned to the theory of price dynamics and investigated data to establish empirical facts. This paper studies the mechanism of price stickiness by examining the role of inventory in the price-setting behavior of a distributive firm empirically using micro-data scanned in retail stores, and through numerical experiments of a quantitative model of a distributive firm.