What Do Customers Pay When Wholesale Prices Change?
Skip to content
Marketing Strategy Oct 5, 2015

What Do Customers Pay When Wholesale Prices Change?

Increases and decreases are not passed through the same way.

Retail prices do not proportionately reflect wholesale price changes.

Yevgenia Nayberg

Based on the research of

Blakeley B. McShane

Chaoqun Chen

Eric T. Anderson

Duncan I. Simester

As consumers, we want to believe there is a clear link between the wholesale price of a product and the price we end up paying for it. Research seems to support this belief: a number of theories predict that when there is a change in the wholesale price of a product—whether it is an orange or a flat-screen TV—the regular retail price will shift in proportion to that change.

“In the theoretical models there’s always a proportional response of some kind,” says Blakeley McShane, an associate professor of marketing at the Kellogg School.

But new research diverges from what shoppers assume and theory has long suggested. Using highly detailed, real-world data, McShane—along with Eric Anderson, a professor of marketing at the Kellogg School, Chaoqun Chen, a Kellogg graduate student in marketing, and Duncan Simester, at MIT’s Sloan School—found that regular retail prices (the shelf prices excluding any sales or promotions) do not always adjust proportionally to wholesale price changes.

In fact, about half the time the retail price does not change at all. Perhaps not surprisingly, it turns out that wholesale price increases are much more likely to be passed on to consumers than decreases.

Passing Through Price Hikes

“What retail managers do when faced with wholesale price changes is an important managerial decision,” McShane says. The decision is critical for retailers because it impacts their profits and profit margins; it is also critical for wholesalers, who ultimately depend on retailers to set a price that consumers will find acceptable.

To investigate these pricing decisions, the researchers worked with a very large national retail chain that sells products across a vast number of categories. They amassed data from the retailer on every time the wholesale price of a product changed over nearly four years, from January 2006 to September 2009—a total of 11,852 instances. Each time, they noted the direction and size of the wholesale price change, as well as any associated shift in the regular retail price.

How wholesale price changes pass through to retail prices.
Rebekka Takamizu

One finding jumped out immediately: a full 44 percent of the time that a wholesale price changed, there was no change at all to the product’s retail price. This suggested to the researchers that managers take a two-pronged approach to pricing decisions: first, they decide whether (and in what direction) they will respond to a wholesale price change—and only later do they decide the magnitude of that change.

A Complicated Decision

So what impacts whether a price will change? For one, managers are more likely to pass through a price change when wholesale prices go up. The difference is dramatic: retail prices rose after 70 percent of wholesale price increases—but fell after only 9 percent of wholesale price decreases.

A number of product characteristics also impact whether a price change is passed through. For example, managers are less likely to change the prices of private-label products relative to national brand products. Consumers often purchase private-label products based on their lower price point—so the retailer may want to keep the retail price steady in the face of a wholesale price increase, even if that means the retailer’s margin decreases.

Managers were also less likely to increase the prices of products with retail prices ending in 99 cents. This is because consumers perceive a $2.99 to $3.09 price hike to be much larger than a $2.89 to $2.99 one.

Researchers also investigated the magnitude of any retail price changes that occurred in response to wholesale price changes. They found that when managers increased retail prices, they did so roughly proportionally to the wholesale increase. But when they decreased retail prices, McShane says, there was “more of a flat adjustment down,” regardless of how large the wholesale price change was. Interestingly, the product characteristics that affect whether retail prices change did not seem to affect the size of the change.

Implications for Wholesalers

Why do retail managers behave so differently in practice than they do in theory?

For one, managers might anticipate future price fluctuations. “If managers expect future wholesale price increases, they might forego lowering a price now only to raise it again a short time in the future,” McShane explains. Managers could also be wary of failing to meet margin targets or could be working to balance prices within a category. In addition, there are costs associated with changing prices. These costs, ranging from physically swapping out one price tag for another to updating software, differ from retailer to retailer, but they tend to make prices “sticky.”

Understanding how retail managers make pricing decisions has implications for manufacturers and wholesalers making their own pricing decisions. Though the current study suggests that wholesale price changes are often not passed through to consumers at all, manufacturers and wholesalers can still hold sway over the retail price. They just may need to take a more direct approach.

“If wholesalers want to affect the price consumers pay, they might want to consider attempting to influence promoted prices rather than regular prices,” McShane says. During Labor Day weekend, for instance, Coke or Pepsi might work directly with retailers to offer discounts, coupons, buy-one-get-one-free offers, or other forms of promotions.

“Wholesalers think a lot about what retailers are going to do in response to their price changes,” explains McShane. “Arranging offers like these takes the guesswork out of it.”

About the Writer
Valerie Ross is a science and technology writer based in New York.
About the Research

McShane, Blakeley B., Chaoqun Chen, Eric T. Anderson, and Duncan I. Simester. Forthcoming. “Decision Stages and Asymmetries in Regular Retail Price Pass-through.” Marketing Science.

Most Popular This Week
  1. Sitting Near a High-Performer Can Make You Better at Your Job
    “Spillover” from certain coworkers can boost our productivity—or jeopardize our employment.
    The spillover effect in offices impacts workers in close physical proximity.
  2. Will AI Kill Human Creativity?
    What Fake Drake tells us about what’s ahead.
    Rockstars await a job interview.
  3. Podcast: How to Discuss Poor Performance with Your Employee
    Giving negative feedback is not easy, but such critiques can be meaningful for both parties if you use the right roadmap. Get advice on this episode of The Insightful Leader.
  4. 2 Factors Will Determine How Much AI Transforms Our Economy
    They’ll also dictate how workers stand to fare.
    robot waiter serves couple in restaurant
  5. How Are Black–White Biracial People Perceived in Terms of Race?
    Understanding the answer—and why black and white Americans may percieve biracial people differently—is increasingly important in a multiracial society.
    How are biracial people perceived in terms of race
  6. The Psychological Factor That Helps Shape Our Moral Decision-Making
    We all have a preferred motivation style. When that aligns with how we’re approaching a specific goal, it can impact how ethical we are in sticky situations.
    a person puts donuts into a bag next to a sign that reads "limit one"
  7. Will AI Eventually Replace Doctors?
    Maybe not entirely. But the doctor–patient relationship is likely to change dramatically.
    doctors offices in small nodules
  8. What’s at Stake in the Debt-Ceiling Standoff?
    Defaulting would be an unmitigated disaster, quickly felt by ordinary Americans.
    two groups of politicians negotiate while dangling upside down from the ceiling of a room
  9. How to Manage a Disengaged Employee—and Get Them Excited about Work Again
    Don’t give up on checked-out team members. Try these strategies instead.
    CEO cheering on team with pom-poms
  10. One Key to a Happy Marriage? A Joint Bank Account.
    Merging finances helps newlyweds align their financial goals and avoid scorekeeping.
    married couple standing at bank teller's window
  11. 5 Tips for Growing as a Leader without Burning Yourself Out
    A leadership coach and former CEO on how to take a holistic approach to your career.
    father picking up kids from school
  12. Why Do Some People Succeed after Failing, While Others Continue to Flounder?
    A new study dispels some of the mystery behind success after failure.
    Scientists build a staircase from paper
  13. Which Form of Government Is Best?
    Democracies may not outlast dictatorships, but they adapt better.
    Is democracy the best form of government?
  14. Daughters’ Math Scores Suffer When They Grow Up in a Family That’s Biased Towards Sons
    Parents, your children are taking their cues about gender roles from you.
    Parents' belief in traditional gender roles can affect daughters' math performance.
  15. Take 5: Research-Backed Tips for Scheduling Your Day
    Kellogg faculty offer ideas for working smarter and not harder.
    A to-do list with easy and hard tasks
  16. What Went Wrong at AIG?
    Unpacking the insurance giant's collapse during the 2008 financial crisis.
    What went wrong during the AIG financial crisis?
  17. Leave My Brand Alone
    What happens when the brands we favor come under attack?
  18. The Second-Mover Advantage
    A primer on how late-entering companies can compete with pioneers.
  19. Take 5: Yikes! When Unintended Consequences Strike
    Good intentions don’t always mean good results. Here’s why humility, and a lot of monitoring, are so important when making big changes.
    People pass an e-cigarette billboard
More in Marketing