What Goes into a Retailer’s Decision to Lower Prices?

“Price frictions” are often a major deterrent

Key Takeaways: 

• Researchers discover three common reasons retailers may be reluctant to adjust prices.
• Sometimes retailers decide to discontinue a product from the shelf before deciding to lower its price.

CATONSVILLE, MD, December 12, 2022 – Holiday shoppers are finding that discounts among some of the items on their shopping lists are a little easier to find this year due to higher inventories at retailers, along with slowing demand due to inflation and certain recessionary economic conditions. At the same time, they may also notice that some retailers are slower to reduce prices to generate sales.

This is due to “price frictions” which make it more difficult and sometimes less cost-effective to actually lower prices. Price frictions were the focus of a new study that identified three reasons retailers are reluctant to adjust new product prices.

That study, published in the current edition of the INFORMS journal Marketing Science is called “Price Frictions and the Success of New Products.”  It is authored by Diego Aparicio of IESE Business School in Barcelona, Spain, and Duncan Simester of the Massachusetts Institute of Technology.

“What are price frictions? Price frictions are simple obstacles that make it more complicated for retailers to adjust prices. We found that retailers may be reluctant to adjust prices on a new product because there may be no price changes on related products, or when state-level pricing laws require price stickers on each package, or when the initial prices end in 99 cents. Our research has found that larger price frictions often lead a retailer to discontinue a poor-performing item before changing its price,” said the study authors.

“A popular pricing tactic is 99-cent endings: $2.99, $9.99, etc. We see this everywhere! Surprisingly, 99-cent endings are a price friction which make it harder for new products to succeed. Intuitively, retailers like to retain 99-cent price endings. And if a new product has low initial sales, retailers prefer not to touch a 99-cent price instead of triggering a promotion, and as a result the product is more likely to be discontinued in the short-run. This is a novel side effect of price endings that managers and scholars might want to input in their models,” said the researchers.

The researchers focused on two events in which retailers face initial demand uncertainty: new stores and new products. The researchers chose these events on the assumption that uncertainty increases the likelihood that retailers will make price adjustments after observing initial sales. This enabled the researchers to determine when and how retailers decided whether to lower prices or discontinue their sales of underperforming new products altogether.

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About INFORMS and Marketing Science

Marketing Science is a premier peer-reviewed scholarly marketing journal focused on research using quantitative approaches to study all aspects of the interface between consumers and firms. It is published by INFORMS, the leading international association for operations research and analytics professionals. More information is available at www.informs.org or @informs.