Decision Stages and Asymmetries in Regular Retail Price Pass-Through

We study how a major retailer passes wholesale price changes onto its regular retail prices using an unusually detailed dataset that allows us to study discrete price change events. The data reveals that the pass-through decision has two components: the firm decides whether to change its regular retail prices, and then conditional on this decision, it selects the magnitude of the price change. Situational factors influence each component of this decision differently. The results also reveal a striking level of asymmetry in the response to wholesale price increases versus decreases. The firm passes wholesale price increases onto its regular retail prices over 60% of the time, with both the likelihood and magnitude of the regular retail price change depending on the magnitude of the wholesale price increase. However, it passes wholesale price decreases on only about 15% of the time, with both the likelihood and magnitude of the regular retail price change largely uninfluenced by the magnitude of the cost decrease.