Working Paper: NBER ID: w9741
Authors: Michael C. Davis; James D. Hamilton
Abstract: The menu-cost interpretation of sticky prices implies that the probability of a price change should depend on the past history of prices and fundamentals only through the gap between the current price and the frictionless price. We find that this prediction is broadly consistent with the behavior of 9 Philadelphia gasoline wholesalers. We nevertheless reject the menu-cost model as a literal description of these firms' behavior, arguing instead that price stickiness arises from strategic considerations of how customers and competitors will react to price changes.
Keywords: sticky prices; wholesale gasoline prices; menu costs; price dynamics
JEL Codes: E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| gap between current price and frictionless price (D41) | probability of price changes (E30) |
| current price slightly below target (D41) | likelihood of price increase (E30) |
| current price slightly above target (D41) | likelihood of price decrease (E30) |
| large price gap (D49) | quicker downward price adjustment (D41) |
| large price gap (D49) | slower upward price adjustment (E31) |
| menu costs (E64) | pricing decisions (L11) |
| expectations about customer and competitor reactions (D84) | pricing decisions (L11) |