Levy, Daniel and Lee, Dongwon and Chen, Haipeng (Allan) and Kauffman, Robert and Bergen, Mark (2007): Price Points and Price Rigidity.
Download (424Kb) | Preview
We offer new evidence on the link between price points and price rigidity using two datasets. One is a large weekly transaction price dataset, covering 29 product categories over an eight-year period from a large U.S. supermarket chain. The other is from the Internet, and includes daily prices over a two-year period for 474 consumer electronic goods covering ten product categories, from 293 different Internet retailers. Across the two datasets, we find that (i) 9 is the most frequently used price-ending for the penny, dime, dollar and the ten-dollar digits, (ii) the most common price changes are in multiples of dimes, dollars, and ten-dollars, (iii) 9-ending prices are at least 24% (and as much as 73%) less likely to change in comparison to prices ending with other digits, and (iv) the average size of the price change is higher if the price ends with 9 in comparison to non-9-ending prices. This link between price points and price rigidity is robust across a wide range of prices, products, product categories, and retail formats. We offer a behavioral explanation for the findings.
|Item Type:||MPRA Paper|
|Institution:||Bar-Ilan University, Korea University, Texas A&M University, University of Minnesota, and University of Minnesota|
|Original Title:||Price Points and Price Rigidity|
|Keywords:||Price Point; 9-Ending Price; Price Rigidity; Rational Inattention; E-Commerce|
|Subjects:||M - Business Administration and Business Economics; Marketing; Accounting > M3 - Marketing and Advertising > M30 - General
E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E12 - Keynes; Keynesian; Post-Keynesian
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L16 - Industrial Organization and Macroeconomics: Industrial Structure and Structural Change; Industrial Price Indices
M - Business Administration and Business Economics; Marketing; Accounting > M2 - Business Economics > M21 - Business Economics
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D80 - General
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation
|Depositing User:||Daniel Levy|
|Date Deposited:||15. Jan 2007|
|Last Modified:||14. Feb 2013 14:56|
Adam, K. (2004), “Optimal Monetary Policy with Imperfect Common Knowledge,” CEPR DP 4594, Centre for Economic Policy Research, London, UK.
Agresti, A. (2002), Categorical Data Analysis, Second Ed. (New York, NY: John Wiley and Sons).
Akerlof, G. A., W. Dickens, and G. Perry (2000), “Near-Rational Wage and Price Setting and the Long Run Phillips Curve,” Brookings Papers on Economic Activity 1, 1–60.
Ameriks, J., A. Caplin, and J. Leahy (2003), “Wealth Accumulation and the Propensity to Plan,” Quarterly Journal of Economics 118(3), 1007–1048.
Ameriks, J., A. Caplin, and J. Leahy (2004), “The Absent-Minded Consumer,” WP 10216, NBER, Cambridge, MA.
Anderson, E. T. and D. I. Simester (2003), “Effects of $9 Price Endings on Retail Sales, Evidence from Field Experiments,” Quantitative Marketing and Economics 1(1), 93–110.
Ball, L. (2000), “Near Rationality and Inflation in Two Monetary Regimes,” Working Paper No. 7988, NBER, Cambridge, MA.
Ball, L. and N. G. Mankiw (1994), “A Sticky-Price Manifesto,” Carnegie-Rochester Conference Series on Public Policy 41 (December), 127–151.
Ball, L., N. G. Mankiw, and R. Reis (2005), “Monetary Policy for Inattentive Economies,” Journal of Monetary Economics 52(4), 703–725.
Ball, L. and D. Romer (1990), “Real Rigidities and Nonneutrality of Money,” Review of Economic Studies 57(2), 183–203.
Ball, L. and D. Romer (2003), “Inflation and the Informativeness of Prices,” Journal of Money, Credit and Banking 35(2), 177–196.
Basu, K. (1997), “Why Are So Many Goods Priced to End in Nine? And Why This Practice Hurts the Producers?” Economics Letters 54(1), 41–44.
Basu, K. (2005), “Consumer Cognition and Pricing in the Nines in Oligopolistic Markets,” Journal of Economics and Management Strategy, 15(1), 125-141.
Bergen M., R. J. Kauffman, and D. Lee (2005), “Beyond the Hype of Frictionless Markets: Evidence of Heterogeneity in Price Rigidity on the Internet” Journal of Management Information Systems 22(2), 57-89.
Bergen, M., D. Levy, S. Ray, P. Rubin, and B. Zeliger (2007), “On the Inefficiency of Item Pricing Laws: Theory and Evidence,” Bar-Ilan University and Emory University Working Paper, presented at the August 2003 NBER Law and Economics Program Meeting, Cambridge, MA.
Bils, M. and P. Klenow (2004), “Some Evidence on the Importance of Sticky Prices” Journal of Political Economy 112 (5), 947–985.
Bizer, G. and R. Schindler (2005), “Direct Evidence of Ending-Digit Drop-Off in Price Information Processing,” Psychology and Marketing 22(10), 771–783.
Blinder, A. S., R. Elie, D. Canetti, D. Lebow, and J. Rudd (1998), Asking About Prices: A New Approach to Understanding Price Stickiness (New York, NY: Russell Sage Foundation).
Campbell, J. and B. Eden (2005), “Rigid Prices: Evidence from U.S. Scanner Data,” Working Paper No. 2005-08, Federal Reserve Bank of Chicago, Chicago, IL.
Caplin, A (1993), “Individual Inertia and Aggregate Dynamics,” in Optimal Pricing, Inflation, and the Cost of Price Adjustment, E. Sheshinski and Y. Weiss (Eds.) (Cambridge, MA: MIT Press), 19–45.
Carlton, D. W. (1986), “The Rigidity of Prices,” American Economic Review 76(4), 637-658.
Carlton, D. W. and J. M. Perloff (2000), Modern Industrial Organization, Third Ed. (Reading, MA: Addison-Wesley).
Cecchetti, S. (1986), "The Frequency of Price Adjustment: A Study of the Newsstand Prices of Magazines," Journal of Econometrics 31(3), 255–274.
Chevalier, J., A. Kashyap, and P. Rossi (2003), “Why Don’t Prices Rise during Periods of Peak Demand? Evidence from Scanner Data,” American Economic Review 93(1), 15–37.
Copeland, L. (2001), “Bill Would Make Pennies Obsolete,” USA Today, Internet Edition (July 19), www.usatoday.com/news/washington/july01/2001-07-19-penny.htm.
Davis, M. C. and J. D. Hamilton (2004), “Why Are Prices Sticky? The Dynamics of Wholesale Gasoline Prices,” Journal of Money, Credit and Banking 36(1), 17–37.
Debaene, S. (1997), The Number Sense: How the Mind Creates Mathematics (New York, NY: Oxford University Press).
Dhyne E., L. J. Alvarez, H. Le Bihan, G. Veronese, D. Dias, J. Hoffmann, N. Jonker, P. Lunnemann, F. Rumler, and J. Vilmunenet (2006), “Price Changes in the Euro Area and the United States: Some Facts from Individual Consumer Price Data,” Journal of Economic Perspectives 20(2), 171–192.
Dutta, S., M. Bergen, D. Levy, and R. Venable (1999), “Menu Costs, Posted Prices, and Multiproduct Retailers,” Journal of Money, Credit, and Banking 31(4), 683–703.
Dutta, S., D. Levy, and M. Bergen (2002), “Price Flexibility in Channels of Distribution: Evidence from Scanner Data,” Journal of Economic Dynamics and Control 26(11), 1845–1900.
Ehrmann, M. (2005), “Inattentive Consumers, Inflation Developments and Perceptions after the Euro Cash Changeover,” Manuscript, Research Department, European Central Bank, Frankfurt, Germany.
Fabiani, S., M. Druant, I. Hernando, C. Kwapil, B. Landau, C. Loupias, F. Martins, T. Mathä, R. Sabbatini, H. Stahl, and A. Stokman (2006), “What Firms’ Surveys Tell Us about Price-Setting Behavior in the Euro Area: New Survey Evidence,” International Journal of Central Banking 2(3), 3-47.
Fengler, M. and J. Winter (2001), “Psychological Pricing Points and Price Adjustment in German Retail Markets,” Manuscript, University of Mannheim, Mannheim, Germany.
Fisher, T. and J. Konieczny (2000), “Synchronization of Price Changes by Multiproduct Firms: Evidence from Canadian Newspaper Prices,” Economics Letters 68(3), 271–277.
Fisher, T. and J. Konieczny (2006), "Inflation and Costly Price Adjustment: A Study of Canadian Newspaper Prices," Journal of Money, Credit and Banking 38(3), 615–633.
Friedman, L. (1967), “Psychological Pricing in the Food Industry,” in Prices: Issues in Theory, Practice and Public Policy, A. Phillips and O.E. Williamson, Eds. (Philadelphia, PA: University of Pennsylvania), 187–201.
Gabor, A. (1988), Pricing: Concepts and Methods for Effective Marketing (Cambridge, UK: Gower). Gabor, A. and C. Granger (1961), “On the Price Consciousness of Consumers,” Applied Statistics 10(3), 170–188.
Ginzberg, E. (1936), “Customary Prices,” American Economic Review 26(2), 296.
Greene, W. H. (2003), Econometric Analysis, Fifth Ed. (Englewood Cliffs, NJ: Prentice Hall).
Heeler, R. and A. Nguyen (2001), “Price Endings in Asia,” in B. Murphy and L. Engle (Eds.), Proceedings of Australia-New Zealand Marketing Association, Auckland, New Zealand.
Hoffmann, J. and J. R. Kurz-Kim (2006), “Consumer Price Adjustment under the Microscope: Germany in a Period of Low Inflation,” DP 16/2006, Deutsche Bundesbank, Frankfurt, Germany.
Hosmer, D. and S. Lemeshow (2000), Applied Logistic Regression, Second Ed. (New York, NY: John Wiley and Sons).
Hinrichs, J., J. Berie, and M. Mosell (1982), “Place Information in Multi-digit Comparison,” Memory and Cognition 7(4), 487–495.
Kalyanaram, G. and J. D.C. Little (1994), “An Empirical Analysis of Latitude of Price Acceptance in Consumer Package Goods,” Journal of Consumer Research 21(3), 408–418.
Kashyap, A. K. (1995), “Sticky Prices: New Evidence from Retail Catalogues,” Quarterly Journal of Economics 110(1), 245–274.
Kauffman, R. J. and D. Lee (2007), “Should We Expect Less Price Rigidity in Internet-Based Selling?” Manuscript, W. P. Carey School of Business, Arizona State University, Phoenix, AZ.
Kauffman, R. J. and C. A. Wood (2007a), “Follow the Leader: Price Change Timing and Strategic Pricing in E-Commerce,” Managerial and Decision Economics, forthcoming.
Kauffman, R. J. and C. A. Wood (2007b), “Revolutionary Research Strategies for E-Business: A Philosophy of Science View in the Age of the Internet,” in R. J. Kauffman and P. A. Tallon (Eds.), Economics, Information Systems, and Electronic Commerce Research: Advanced Empirical Methodologies, in V. Zwass, Series Editor, Advances in Management Information Systems Series, M. E. Sharpe, Armonk, NY, forthcoming.
Klenow, P and J. Willis (2006), "Sticky Information and Sticky Prices," Working Paper, Federal Reserve Bank of Kansas City, Kansas City, MO.
Knotek, E. S., II (2004), "Nominal Rigidity, Convenient Prices and Currency: Theory with Evidence from Newspaper Prices," Manuscript, University of Michigan, Ann Arbor, MI.
Knotek, E. S., II (2006a), "Connecting Convenient Prices and Price Rigidity: Cross Sectional Evidence," Working Paper, Federal Reserve Bank of Kansas City, Kansas City, MO.
Knotek, E. S., II (2006b), "A Tale of Two Rigidities: Sticky Prices in a Sticky-Information Environment," Working Paper, Federal Reserve Bank of Kansas City, Kansas City, MO.
Konieczny, J. (2003), "Discussant Comments [on this Paper]," Central European University Conference on "Microeconomic Pricing and the Macroeconomy," Budapest, Hungary, 2003.
Konieczny, J. and A. Skrzypacz (2003), “A New Test of the Menu Cost Model,” Manuscript, European Center for Advanced Research in Economic and Statistics, Universite Libre de Bruxelles, Bruxelles, Belgium.
Konieczny, J. and A. Skrzypacz (2004), “Search, Costly Price Adjustment and the Frequency of Price Changes: Theory and Evidence,” Manuscript, Stanford University, Stanford, CA.
Konieczny, J. and A. Skrzypacz (2005), “Inflation and Price Setting: Evidence from a Natural Experiment,” Journal of Monetary Economics 52(3), 621–632.
Lach, S. and D. Tsiddon (1996), “Staggering and Synchronization in Price-Setting: Evidence from Multiproduct Firms,” American Economic Review 86(5), 1175–1196.
Lambert, Z. (1975), “Perceived Prices as Related to Odd and Even Price Endings” Journal of Retailing 51(3), 13–22.
Landsburg, S. (1995), The Armchair Economist: Economics and Everyday Life (New York, NY: Free Press).
Levy, D. (1990), “Specification and Estimation of Forecast Generating Equations in Models with Rational Expectations,” Chapter 3 in Three Essays in Dynamic Macroeconomics, unpublished Ph.D. Thesis, Economics Department, University of California, Irvine, CA.
Levy D., M. Bergen, S. Dutta and R. Venable (1997), “The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains” Quarterly Journal of Economics 112(3), 791–825.
Levy, D., H. Chen, S. Ray and M. Bergen (2006), “Asymmetric Price Adjustment in the Small,” Working Paper, Economics Department, Bar-Ilan University and Emory University.
Levy, D., S. Dutta, M. Bergen, and R. Venable (1998), “Price Adjustment at Multiproduct Retailers,” Managerial and Decision Economics 19(2), 81–120.
Levy, D. and A. Young (2004), “The Real Thing: Nominal Price Rigidity of the Nickel Coke, 1886–1959,” Journal of Money, Credit and Banking 36(4), 765–799.
Mankiw, N. G. (1985), “Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly,” Quarterly Journal of Economics 100(2), 529–538.
Mankiw, N. G., and R. Reis (2002), “Sticky Decisions Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve” Quarterly Journal of Economics 117(4), 1295–1328.
Mirhadi, D. (2000), “Hotels Reach Overseas to Fill Beds, Restaurants, Showrooms,” Las Vegas Review-Journal, May 18.
Monroe, K. (1970), “Buyers’ Subjective Perceptions of Price,” Journal of Marketing Research 10(1), 70–80.
Monroe, K. (1990), Pricing: Making Profitable Decisions, 2nd Ed. (Boston, MA: McGraw Hill).
Monroe, K. (2001), “Pricing and Sales Promotion,” in G. Salvendy (Ed.), Handbook of Industrial Engineering: Technology and Operations Management (New York, NY: John Wiley and Sons), 665–683.
Mostacci, F. and R. Sabbatini (2003), “Has the Euro Caused Inflation? The Changeover and Consumer Price Rounding in Italy in 2002,” Working Paper, Istituto Nazionale di Statistica, Rome, Italy.
Nagle, T. T. and R. K. Holden (1995), The Strategy and Tactics of Pricing: A Guide to Profitable Decision Making, 2nd Ed. (Englewood Cliffs, NJ: Prentice Hall).
Office of the Inspector General (1995), “The House’s Gift Shop’s Internal Controls Need to Be Improved,” Report No. 95-CAO-05, U.S. House of Representatives, Washington, DC (July 18), www.house.gov/IG/Reports.html.
Pfanner, E. (2002), “Euro Quandary: It’s No Small Change,” International Herald Tribune, Tel-Aviv Edition (March 22), 1.
Poltrock, S. and D. Schwartz (1984), “Comparative Judgments of Multidigit Numbers,” Journal of Experimental Psychology 10(1), 32–45.
Rátfai, Attila (2003), “The Dynamics of Pricing Points,” Manuscript, Central European University, Budapest, Hungary. Rawe, J. (2004), “Vegas Plays to the World,” Time, July 26, 34–35.
Reis, R. (2006a), “Inattentive Consumers” Journal of Monetary Economics 53(8), 1761–1800.
Reis, R. (2006b), “Inattentive Producers,” Review of Economic Studies 73(3), 793–821.
Rotemberg, J. (1987), “The New Keynesian Microfoundations,” NBER Macro Annual, 69–104.
Rotemberg, J. (2003), “The Benevolence of the Baker: Fair Pricing under Threat of Customer Anger,” manuscript, Harvard Business School, Cambridge, MA.
Rotemberg, J. (2005), “Customer Anger at Price Increases, Changes in the Frequency of Price Adjustment, and Monetary Policy,” Journal of Monetary Economics 52(4), 829852.
Roufagalas, J. (1994), “Price Rigidity: An Exploration of the Demand Side,” Managerial and Decision Economics 15(1), 87–94.
Rubin, P. (1999) “The 1¢ Nuisance,” Regulation: The Cato Review of Business and Government 22(1), 3.
Ruffle, B. J. and Z. Shtudiner (2006), “99: Are Retailers Best Responding to Rational Consumers? Experimental Evidence,” Managerial and Decision Economics 27(6), 459-475.
Schindler, R. M. (2006), “The 99-Price Ending as a Signal of a Low Price Appeal,” Journal of Retailing, 82(1), 71-77.
Schindler, R. and P. Kirby (1997), “Patterns of Rightmost Digits Used in Advertised Prices: Implications for Nine-Ending Effects,” Journal of Consumer Research 24(2), 192–201.
Shapiro, B. (1968), “The Psychology of Pricing,” Harvard Business Review 46(4), 14–25.
Shugan, S. (1980), “The Cost of Thinking,” Journal of Consumer Research 7(2), 99–111.
Sims, C. (1998), “Stickiness” Carnegie-Rochester Conference Series on Public Policy 49(1), 317–356.
Sims, C. (2003), “Implications of Rational Inattention,” Journal of Monetary Economics 50(3), 665–690.
Slade, M. E. (1998), “Optimal Pricing with Costly Adjustment: Evidence from Retail-Grocery Prices,” Review of Economic Studies 65(1), 87–107.
Stahl, H. (2006) “Price Adjustment in German Manufacturing: Evidence from Two Merged Surveys,” Discussion Paper, Deutsche Bundesbank.
Warner, E. and R. Barsky (1995), “The Timing and Magnitude of Retail Store Markdowns: Evidence from Weekends and Holidays,” Quarterly Journal of Economics 110(2), 321–352.
Willis, J. (2003), “Implications of Structural Changes in the U.S. Economy for Pricing Behavior and Inflation Dynamics,” Federal Reserve Bank of Kansas City Economic Review, Kansas City, MO (1st quarter), 5–26.
Wolman, A. L. (2007), “The Frequency and Costs of Individual Price Adjustment: A Survey,” Managerial and Decision Economics, forthcoming.
Woodford, M. (2003), “Imperfect Common Knowledge and the Effects of Monetary Policy,” in Aghion, P., R. Frydman, J. Stiglitz, and M. Woodford (Eds.), Knowledge, Information, and Expectations in Modern Macroeconomics, In Honor of Edmund S. Phelps, Princeton University Press, Princeton, NJ.
Wooldridge, J. (2002), Econometric Analysis of Cross Section and Panel Data (Cambridge, UK: MIT Press).
Zbaracki, M., M. Ritson, D. Levy, S. Dutta, and M. Bergen (2004), “Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets,” Review of Economics and Statistics 86(2), 514-33.