NBER WORKING PAPER SERIES

COSTS OF MANAGERIAL ATTENTION AND ACTIVITY AS A SOURCE OF STICKY PRICES: STRUCTURAL ESTIMATES FROM AN ONLINE MARKET

Sara Fisher Ellison Christopher Snyder Hongkai Zhang

Working Paper 24680 http://www.nber.org/papers/w24680

NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 June 2018

The authors are grateful to Baye, Steve Berry, Judy Chevalier, Oliver Compte, Glenn Ellison, Jakub Kastl, Peter Klenow, John Leahy, Emi Nakamura, Whitney Newey, Mo Xiao, and Jidong Zhou for their insightful advice; to Masao Fukui for outstanding research assistance; and to seminar participants at , Cornell, Harvard, M.I.T., Paris School of Economics, Toronto, and Yale and conference participants at the ASSA Meetings, HSE--Perm International Conference on Applied Research in Economics, International Industrial Organization Conference (Boston), International Symposium on Recent Developments in Econometric Theory with Applications in Honor of Jerry Hausman (Xiamen University), NBER Summer Institute (IT and Digitization and Economic Fluctuations Meetings), and Tuck School of Business Winter Industrial Organization Workshop for helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

© 2018 by Sara Fisher Ellison, Christopher Snyder, and Hongkai Zhang. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Costs of Managerial Attention and Activity as a Source of Sticky Prices: Structural Estimates from an Online Market Sara Fisher Ellison, Christopher Snyder, and Hongkai Zhang NBER Working Paper No. 24680 June 2018 JEL No. L11

ABSTRACT

We study price dynamics for computer components sold on a price-comparison website. Our fine-grained data—a year of hourly price data for scores of rival retailers—allow us to estimate a dynamic model of competition, backing out structural estimates of managerial frictions. The estimated frictions are substantial, concentrated in the act of monitoring market conditions rather than entering a new price. We use our model to simulate the counterfactual gains from automated price setting and other managerial changes. Coupled with supporting reduced-form statistical evidence, our analysis provides a window into the process of managerial price setting and the microfoundation of pricing inertia, issues of growing interest in industrial organization and macroeconomics.

Sara Fisher Ellison Hongkai Zhang Department of Economics Pandora Media, Inc MIT, E52-428 344 Westline Drive C313 77 Massachusetts Avenue Alameda, CA 94501 Cambridge, MA 02139 [email protected] [email protected]

Christopher Snyder Department of Economics Dartmouth College 301 Rockefeller Hall Hanover, NH 03755 and NBER [email protected] 1. Introduction

Managerial frictions can be broadly construed as a cost associated with the manager’s overlooked but es- sential input into the operation of a firm. Textbook industrial-organization models leave little room for managerial frictions. Consider, for example, the ubiquitous pricing decision. Firms in most industries have some discretion over their output price, which may require dynamic adjustment to changing supply and de- mand conditions. When does the manager make these price changes? By how much? Textbook industrial- organization models would say price is changed precisely when and by the amount dictated by strategic considerations based on all available information. Other economic subdisciplines have paid more attention