Snir, Avichai and Levy, Daniel (2011): Shrinking Goods and Sticky Prices: Theory and Evidence.
Download (566kB) | Preview
If producers have more information than consumers about goods’ attributes, then they may use non-price (rather than price) adjustment mechanisms and, consequently, the market may reach a new equilibrium even if prices remain sticky. We study a situation where producers adjust the quantity (per package) rather than the price in response to changes in market conditions. Although consumers should be indifferent between equivalent changes in goods' prices and quantities, empirical evidence suggests that consumers often respond differently to price changes and equivalent quantity changes. We offer a possible explanation for this puzzle by constructing and empirically testing a model in which consumers incur cognitive costs when processing goods’ price and quantity information. The model is based on evidence from cognitive psychology and explains consumers’ decision whether or not to process goods’ price and quantity information. Our findings explain why producers sometimes adjust goods’ prices and sometimes goods’ quantities. In addition, they predict variability in price adjustment costs over time and across economic conditions.
|Item Type:||MPRA Paper|
|Original Title:||Shrinking Goods and Sticky Prices: Theory and Evidence|
|Keywords:||Sticky Prices; Rigid Prices; Cognitive Costs of Attention; Information Processing Cost; Rational Inattention; Price Adjustment; Quantity Adjustment; Downsizing;|
|Subjects:||D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior: Theory
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure; Size Distribution of Firms
D - Microeconomics > D1 - Household Behavior and Family Economics > D11 - Consumer Economics: Theory
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation
D - Microeconomics > D4 - Market Structure and Pricing > D40 - General
L - Industrial Organization > L0 - General > L00 - General
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L16 - Industrial Organization and Macroeconomics: Industrial Structure and Structural Change; Industrial Price Indices
D - Microeconomics > D0 - General > D03 - Behavioral Economics; Underlying Principles
M - Business Administration and Business Economics; Marketing; Accounting > M3 - Marketing and Advertising > M31 - Marketing
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L15 - Information and Product Quality; Standardization and Compatibility
M - Business Administration and Business Economics; Marketing; Accounting > M2 - Business Economics > M21 - Business Economics
|Depositing User:||Daniel Levy|
|Date Deposited:||18. Mar 2011 00:55|
|Last Modified:||13. Feb 2013 09:33|
Ameriks, J., A. Caplin, and J. Leahy (2004), “The Absent-Minded Consumers,” NBER Working Paper, No. 10216. Armstrong, M. and Y. Chen (2009), “Inattentive Consumers and Product Quality,” Journal of the European Economic Association 7, 411–422. Ball, L., N.G. Mankiw, and R. Reis (2005), “Monetary Policy for Inattentive Economies,” Journal of Monetary Economics 52, 703–725. Bils, M. and P.J. Klenow (2004), “Some Evidence on the Importance of Sticky Prices,” Journal of Political Economy 112 , 947–985. Blanchard, O. and S. Fischer (1989), Lectures on Macroeconomics (Cambridge, MA: MIT Press) Blinder, A.S., E.D. Canetti, D.E. Lebow and J.B. Rudd (1998), Asking about Prices: A New Approach to Understanding Price Stickiness (New York, NY: Russell Sage Foundation). Carlton, D.W. (1977), “Equilibrium in Markets Where Price Exceeds Cost: Uncertainty, Production Lags, and Pricing, ” American Economic Review 67, 244–249. Carlton, D.W. (1983), “Equilibrium Fluctuations when Price and Delivery Lag Clear the Market,” Bell Journal of Economics 14, 562–572. Carlton, D.W. (1989), “The Theory and the Facts of How Markets Clear: Is Industrial Organization Valuable for Understanding Macroeconomics?" in Handbook of Industrial Organization, Vol. 1, R. Schmalensee and R. Willig (Eds.), (Maryland Heights, MO: Elsevier), 909–946. Carlton, D.W. (1991), “The Theory of Allocation and Its Implications for Marketing and Industrial Structure: Why Rationing is Efficient,” Journal of Law and Economics 34, 231–262. Chen, H., D. Levy, S. Ray and M. Bergen (2008), “Asymmetric Price Adjustment in the Small,” Journal of Monetary Economics 55, 728–737. Chevalier, J. A., A.K. Kashyap, and P.E. Rossi (2003), “Why Don’t Prices Rise in Periods of Peak Demand? Evidence from Scanner Data,” American Economic Review 93, 15–37. Dehn, M.J. (2008), Working Memory and Academic Learning: Assessment and Intervention (Bognor Regis, UK: John Wiley and Sons). Dickson, P.R. and A.G. Sawyer (1990), “The Price Knowledge and Search of Supermarket Shoppers,” Journal of Marketing 54, 42–53. Dotsey, M., R.G. King and A.L. Wolman (1999), “State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output,” Quarterly Journal of Economics 114 , 655–690. Ehrmann, M. (2011), "Inflation Developments and Perceptions After the Euro Cash Changeover," German Economic Review, forthcoming. Eichenbaum, M., N. Jaimovich, and S. Rebelo (2011) “Reference Prices, Costs and Nominal Rigidities,” American Economic Review 101, 234–262. Falkinger, J. (2008), “Limited Attention as a Scarce Resource in Information-Rich Economies,” Economic Journal 118, 1596–1620. Fox, E. J. and S.J. Hoch (2005), “Cherry Pickers,” Journal of Marketing 69, 46–62. Gabaix, X. and D. Laibson (2006), “Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets,” Quarterly Journal of Economics 121, 505–540. Gabaix, X., D. Laibson, G. Molocho and S. Weinberg (2006), “Costly Information Acquisition: Experimental Analysis of Bounded Rational Model,” American Economic Review 96, 1043–1068. Gabor, A. and C.W.J. Granger (1961), “On the Price Consciousness of Consumers,” Applied Statistics 10, 170–188. Gabor, A. and C.W.J. Granger (1966), “Price as an Indicator of Quality; Report on an Enquiry,” Economica 33, 43–70. Gagnon, E. (2009), “Price Setting During Low and High Inflation: Evidence from Mexico,” Quarterly Journal of Economics 124, 1221–1263. Galí, J. (2008), Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework (Princeton, NJ: Princeton University Press). Gourville, J.T. and J.J. Koehler (2004), Downsizing Price Increases: A Greater Sensitivity to Price than Quantity in Consumer Markets,” Research Paper No. 04-01, Harvard Business School. Gupta, S. and P. Chintagunta (1994), “On Using Demographic Variables to Determine Segment Membership in Logit Mixture Models,” Journal of Marketing Research 31, 128–136. Hoch, S.J., B.D. Kim, A.L. Montgomery, and P.E. Rossi (1995), “Determinants of Store-Level Price Elasticity,” Journal of Marketing Research 32, 17–29. Kahneman, D. and S. Frederick (2002), “Representativeness Revisited: Attribute Substitution in Intuitive Judgment,” in Heuristics and Biases: The Psychology of Intuitive Judgment, T. Gilovich, D. Griffin and D. Kahneman (eds.), (New York, NY: Cambridge University Press), 49–81. Kahneman, D. and A. Treisman (1984), “Changing Views of Attention and Automaticity,” in R. Parasuraman, D. Davies and J. Beatty (Eds.), Variants of Attention (New York, NY: Academic Press). Kalyanaram, G. and R.S. Winer (1995), “Empirical Generalizations from Reference Price Research,” Marketing Science 14, G161–G169. Kehoe, P. J. and V. Midrigan (2008), “Temporary Price Changes and the Real Effects of Monetary Policy,” NBER Working Paper, No. 14392. Klenow, P. and B. Malin (2010), “Microeconomic Evidence on Price-Setting,” NBER Working Paper, No. 15826. Klenow, P. and J. Willis (2007), “Sticky Information and Sticky Prices,” Journal of Monetary Economics 54 (Supplement 1), 79–99. Knotek, E.S. II (2010), “A Tale of Two Rigidities: Sticky Prices in a Sticky-Information Environment,” Journal of Money, Credit and Banking 42, 1543–1564. Knotek, E.S. II (2011), “Convenient Prices and Price Rigidity: Cross-Section Evidence,” Review of Economics and Statistics, forthcoming. Konieczny, J. (1993), “Variable Price Adjustment Costs,” Economic Inquiry 31, 488–98. Krieder, R.E. and S. Han (2004), “Promotion Thresholds: Price Change Insensitivity or Risk Hurdle?" Canadian Journal of Administrative Sciences 21, 255–271. Laibson, D. (2001), “A Cue Theory of Consumption,” Quarterly Journal of Economics 116, 81–119. Levy, D., H. Chen, G. Müller, S. Dutta and M. Bergen (2010), “Holiday Price Rigidity and Cost of Price Adjustment,” Economica 77, 172–198. Levy, D., D. Lee, H. Chen, R. Kauffman, and M. Bergen (2011), “Price Points and Price Rigidity,” Review of Economics and Statistics, forthcoming. 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, 765–799. 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, 1295–1328. Mankiw, N.G. and R. Reis (2007), “Sticky Information in General Equilibrium,” Journal of the European Economic Association 2, 603–613. Mankiw, N.G. and R. Reis (2010), “Imperfect Information and Aggregate Supply,” NBER Working Paper, No. 15773. Mazumdar, T. and P. Papatla (2000), “An Investigation of Reference Price Segments,” Journal of Marketing Research 37, 246–258. Miyazaki, D., D. Sprott and K. Manning (2000), “Unit Prices on Retail Shelf Labels: An Assessment of Information Prominence,” Journal of Retailing 76, 93–112. Monroe, K.B. and A.Y. Lee (1999), “Remembering Versus Knowing: Issues in Buyers’ Processing of Price Information,” Academy of Marketing Science 27, 207–225. Mortimer, G.S. (2009), “Profiling the Male Grocery Shopper,” Ph.D. Thesis, Griffith Business School, Griffith University. Nakamura, E. and J. Steinsson (2008), “Five Facts About Prices: A Reevaluation of Menu Cost Models,” Quarterly Journal of Economics 123, 1415–1464. Navon, D. and D. Gopher (1979), “On the Economy of the Human Processing System,” Psychological Review 86, 215–255. Raajpoot, N.A., A. Sharma, and J.C. Chebat (2008), “The Role of Gender and Work Status in Shopping Center Patronage,” Journal of Business Research 61, 825–833. Reis, R. (2006a), “Inattentive Consumers,” Journal of Monetary Economics 53, 1761–1800. Reis, R. (2006b), “Inattentive Producers,” Review of Economic Studies 73, 793–821. Reis, R. (2009), “Optimal Monetary Policy Rules in an Estimated Sticky-Information Model,” American Economic Journal: Macroeconomics 1, 1–28. Rosen, S. (1974), “Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition, ” Journal of Political Economy 82, 34–55. Rotemberg, J.J. (1983), “Sticky Prices in the United States,” Journal of Political Economy 90, 1187–1211. Rotemberg, J.J. (2005), “Customer Anger at Price Increases, Changes in the Frequency of Price Adjustment and Monetary Policy,” Journal of Monetary Economics 52, 829–852. Sims, C. (2003), “Implication of Rational Inattention,” Journal of Monetary Economics 50, 665–690. Smith, E.E., S. Nolen-Hoeksema, B.L. Fredrickson and G.L. Loftus (2003), Atkinson and Hilgard’s Introduction to Psychology, 14th Edition (Belmont, CA: Wadswoth/Thomson Learning). Swan, P.L. (1970), “Market Structure and Technological Progress: The Influence of Monopoly on Product Innovation,” Quarterly Journal of Economics 84, 627–638. Thaler, R.H. (2000), “From Homo Economicus to Homo Sapiens,” Journal of Economic Perspectives 14, 133–141. Treisman, A. (1993), “The Perception of Features and Objects,” in A. Baddeley and L. Weiskrantz (Eds.), Attention: Selection, Awareness and Control – a Tribute to Donald Broadbent (Oxford: Clarendon Press University), 5–35. Vanhuele, M. and X. Drèze (2002), “Measuring the Price Knowledge Shoppers Bring to the Store,” Journal of Marketing 66, 72–85. Warner, E.J. and R.B. Barsky (1995), “The Timing and Magnitude of Retail Store Markdowns: Evidence from Weekends and Holidays,” Quarterly Journal of Economics 110, 321–352.