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

We study the supply chain implications of dynamic pricing. Specifically, we estimate how reducing menu costs---the operational burden of adjusting prices---would affect supply chain volatility. Fitting a structural econometric model to data from a large Chinese supermarket chain, we estimate that removing menu costs would: (i) reduce the mean shipment coefficient of variation by $7.2$ percentage points (pp), (ii) reduce the mean sales coefficient of variation by $4.3$ pp, and (iii) reduce the mean bullwhip effect by $2.9$ pp. These stabilizing changes are almost entirely attributable to an increase in the mean sales rate.