Estimating menu costs in electronic markets

Anindya Ghose, Bin Gu

Research output: Chapter in Book/Report/Conference proceedingConference contribution

Abstract

Menu costs, or price adjustment costs, refer to the total cost of changing the price of a product, which includes the physical cost of making the change as well as the managerial cost of making the price change decision. Prior work has presumed that online retailers face no menu costs, potentially leading to Bertrand competition and the Law of One Price. However, little empirical evidence exists to assess the assumption. The objective of this research is therefore to empirically assess the magnitude of menu costs faced by online retailers. Using a nine-month productlevel price and demand data from Amazon, we infer menu costs based on the retailer's price change decisions. A key challenge in this estimation is that price change decisions are driven by changes in a retailer's expectation of future demand, which is not directly observable by researchers. We use statistical methods to infer expected demand from realized demand, thus identifying the magnitude of price adjustment cost econometrically. We find that online retailers face non-negligible menu costs, representing about 0.2% of their gross revenues. Our results also reveal that menu costs at online retailers exhibit unique characteristics. Compared with prior studies in physical retailers, the result shows that online retailers incur significantly higher menu costs per price change, but the costs account for a lower proportion of the total revenue. We attribute this phenomenon to the scale economies of online retailers.

Original languageEnglish (US)
Title of host publicationICIS 2007 Proceedings - Twenty Eighth International Conference on Information Systems
StatePublished - 2007
Externally publishedYes
Event28th International Conference on Information Systems, ICIS 2007 - Montreal, QC, Canada
Duration: Dec 9 2007Dec 12 2007

Other

Other28th International Conference on Information Systems, ICIS 2007
CountryCanada
CityMontreal, QC
Period12/9/0712/12/07

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Cost estimating
Costs

Keywords

  • Electronic commerce
  • Menu costs
  • Online price competition
  • Product variety
  • Web based retailers

ASJC Scopus subject areas

  • Information Systems

Cite this

Ghose, A., & Gu, B. (2007). Estimating menu costs in electronic markets. In ICIS 2007 Proceedings - Twenty Eighth International Conference on Information Systems

Estimating menu costs in electronic markets. / Ghose, Anindya; Gu, Bin.

ICIS 2007 Proceedings - Twenty Eighth International Conference on Information Systems. 2007.

Research output: Chapter in Book/Report/Conference proceedingConference contribution

Ghose, A & Gu, B 2007, Estimating menu costs in electronic markets. in ICIS 2007 Proceedings - Twenty Eighth International Conference on Information Systems. 28th International Conference on Information Systems, ICIS 2007, Montreal, QC, Canada, 12/9/07.
Ghose A, Gu B. Estimating menu costs in electronic markets. In ICIS 2007 Proceedings - Twenty Eighth International Conference on Information Systems. 2007
Ghose, Anindya ; Gu, Bin. / Estimating menu costs in electronic markets. ICIS 2007 Proceedings - Twenty Eighth International Conference on Information Systems. 2007.
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