Estimating the Operational Costs of Pricing

We build a structural econometric model of pricing substitutes with menu costs and apply it to quasi-experimental data to estimate the share of physical menu costs (material and labor costs of price adjustment) in total menu costs. The data comes from the adoption of electronic shelf labels (ESLs) by some---but not all---of the UK stores of an international retailer in 2015. ESLs replace the physical price adjustment process (printing new price stickers, locating the products in the aisles, and replacing the old stickers) with a digital one, thus eliminating physical menu costs. We estimate physical menu costs using both moment inequalities and maximum likelihood. Our estimate of the share of physical menu costs in total menu costs ranges between 30 percent and 60 percent across specifications