Menu Costs and Sale Strategies of Multiproduct Retailers

In a typical sale model, retailers compete for informed consumers by changing prices in every period. Thus, if menu costs resist price adjustments, they prevent not only prices from equilibrating demands and supplies, but also retailers' competition. I investigate the effects of menu costs on the sale strategies of multiproduct retailers. If menu costs are positive and less than a critical level, each store will place a subset of items on sale, so that the marginal menu cost is equal to the benefit of an additional item being on sale. Non-sale items create a problem because they are easily undercut by rival stores. To prevent undercutting, the stores will hide the identity of the non-sale items and choose prices of the sale items from a continuous distribution. Consequently, we observe both regular prices and periodic sales. Over seasonal cycles menu costs do not change, but bulk purchases occur in seasonal peak periods. This triggers more sale items and as a result the stores lower average prices in peaks