The Federal Reserve Bank of New York today released Sticky Prices: Why Firms Hesitate to Adjust the Price of Their Goods, the latest article in its series Current Issues in Economics and Finance.
In this new study of one of the more puzzling phenomena in economics, authors Pinelopi Goldberg and Rebecca Hellerstein argue that firms’ resistance to changing the price of their goods derives in significant measure from "repricing costs" at the wholesale level.
Repricing costs, the authors explain, include the managerial time to determine a new optimal price and the costs of implementing and advertising the new price, as well as the risk of losing long-term customers if the price rises. While earlier studies of price stickiness have suggested a role for repricing costs, there has been little agreement on the magnitude or importance of these costs.
Taking the imported beer market as their subject, Goldberg and Hellerstein estimate the costs of repricing to be 0.4 percent of firm revenue for manufacturers and 0.1 percent of firm revenue for retailers. While not large in absolute terms, these costs are of sufficient magnitude to discourage firms—especially manufacturers—from adjusting their prices.
Goldberg and Hellerstein also compare repricing costs with two other sources of price rigidity for imported goods: markup adjustment, or the tendency of firms to moderate any increase in their prices in order to preserve market share, and the existence of a "local" component in the price of imported goods that does not fluctuate with changes in the exchange rate. All three factors create price stickiness, the authors note, "by limiting the degree to which prices respond to exchange rate changes—or, in the language of economists, by rendering the … ‘pass through’ of exchange rate changes to prices 'incomplete.'" The authors’ calculations suggest that while markup adjustment and local costs account for the largest share of the incomplete pass-through observed in the data on beer prices, repricing costs are a "substantial contributor" to the low pass-through rates.
According to Goldberg and Hellerstein, the approach used in their study to analyze price rigidity is not specific to the beer market: "The methodology we propose … can be more generally applied to any market for which data are recorded at frequent enough intervals to identify the points of price adjustment."
Pinelopi Goldberg is a professor of economics at Princeton University; Rebecca Hellerstein is an economist in the International Research Function of the Research and Statistics Group.
Sticky Prices: Why Firms Hesitate to Adjust the Price of Their Goods ››