Essay on Bun and Ellis Supermarket Analysis of Cost and Prices
Bunn and Ellis suggested that comparing the probability of price change in a different period could help them find if the time-dependent models match their data. These models have the same probability on price flexibility in each stage. There are two ways to examine this one is comparing the frequency of price adjustment in different time period; the other is to draw the diagram of the hazard function.
In their study, the correlation coefficient between price increasing rate and inflation is 0.6, which indicated there is a positive relationship. Instead, there is little correlation between share of decreasing price and inflation. (Figure 4) Meanwhile, Bunn and Ellis hold the point …show more content…
Also there is similarity between the distribution of the size of supermarket price flexibility and consumer goods price change. (Figure 5) However, the difference in the proportion of small price change within two datasets is insignificant. This is why Bunn and Ellis suggest that the higher frequency of price change in supermarket data could not be well explained by the assumption of short-term promotion.
State dependent models included two assumptions: one is the menu cost for changing price, and the other is the negative effect on large price adjustments. However, it may not be crucial for firms to consider small fixed cost of changing price, which reflect in the data of small price adjustments. Besides, there is little negative effect on large price changes faced by firms as they observed. Therefore they pointed out that the behaviour of price-setting in most firms could not be explained by the single state-dependent model.
2.5 The correlations between frequency and size of price flexibility
Bunn and Ellis assumed that the there is a connection between the frequency and size of the of price changes, which is based on their pervious observation of the wide distribution of price adjustment. The relationship could be described as