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Asking About Prices

A New Approach to Understanding Price Stickiness

Alan Blinder, Elie R.D. Canetti, David E. Lebow, Jeremy B. Rudd

Publication Year: 1998

Why do consumer prices and wages adjust so slowly to changes in market conditions? The rigidity or stickiness of price setting in business is central to Keynesian economic theory and a key to understanding how monetary policy works, yet economists have made little headway in determining why it occurs. Asking About Prices offers a groundbreaking empirical approach to a puzzle for which theories abound but facts are scarce. Leading economist Alan Blinder, along with co-authors Elie Canetti, David Lebow, and Jeremy B. Rudd, interviewed a national, multi-industry sample of 200 CEOs, company heads, and other corporate price setters to test the validity of twelve prominent theories of price stickiness. Using everyday language and pertinent scenarios, the carefully designed survey asked decisionmakers how prominently these theoretical concerns entered into their own attitudes and thought processes. Do businesses tend to view the costs of changing prices as prohibitive? Do they worry that lower prices will be equated with poorer quality goods? Are firms more likely to try alternate strategies to changing prices, such as warehousing excess inventory or improving their quality of service? To what extent are prices held in place by contractual agreements, or by invisible handshakes? Asking About Prices offers a gold mine of previously unavailable information. It affirms the widespread presence of price stickiness in American industry, and offers the only available guide to such business details as what fraction of goods are sold by fixed price contract, how often transactions involve repeat customers, and how and when firms review their prices. Some results are surprising: contrary to popular wisdom, prices do not increase more easily than they decrease, and firms do not appear to practice anticipatory pricing, even when they can foresee cost increases. Asking About Prices also offers a chapter-by-chapter review of the survey findings for each of the twelve theories of price stickiness. The authors determine which theories are most popular with actual price setters, how practices vary within different business sectors, across firms of different sizes, and so on. They also direct economists' attention toward a rationale for price stickiness that does not stem from conventional theory, namely a strong reluctance by firms to antagonize or inconvenience their customers. By illuminating how company executives actually think about price setting, Asking About Prices provides an elegant model of a valuable new approach to conducting economic research.

Published by: Russell Sage Foundation

Title Page, Copyright, Dedication

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Contents

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pp. vii-x

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Preface

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pp. xi-xiv

What a long, strange trip this research project has been. The tale needs to be told here, for it explains both the long gestation period since the interviews ended (in March 1992) and the complicated coauthorship of this book. It also gives credit where credit is due...

Part I: On Learning by Asking

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pp. 1-2

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Chapter 1: Why Study Price Stickiness? Why This Way?

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pp. 3-15

In recent decades, macroeconomic theorists have devoted enormous amounts of time, thought, and energy to the search for better microtheoretic foundations for macroeconomic behavior. Nowhere has this search borne less fruit than in seeking answers to the following...

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Chapter 2: Antecedents

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pp. 16-46

This chapter offers a highly selective summary of previous research on price stickiness. The intent is not to provide a comprehensive survey of all the relevant literature; in particular, scant attention is paid to the mountains of empirical work that support the view that...

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Chapter 3: Research Design

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pp. 47-80

It is a troublesome truism of survey research that the details of how you ask a question, and to whom, exert a powerful influence on the answers you get. So we take pains in this chapter to spell out precisely how the survey was designed and conducted. Providing such...

Part II: The Basic Findings

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pp. 81-82

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Chapter 4: Wouldn't It Be Nice to Know ... ? The Factual Basis for Theories of Price Stickiness

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pp. 83-106

This study was motivated by the belief that theories of price rigidity were being generated in an empirical vacuum, insufficiently informed by the facts. What share of United States GDP is sold under nominal contracts? For how long do those contracts normally...

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Chapter 5: Basic Results on the Twelve Theories

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pp. 107-126

The main objective of the survey was not to compile the unadorned facts that were examined in chapter 4, fascinating as they may be. Rather, the study was designed to gather the opinions of real-world decision makers on the validity of economists' theories of price...

Part III: Detailed Findings on Each Theory

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pp. 127-128

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Chapter 6: Nominal Contracting

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pp. 129-148

This is the first in a series of twelve short chapters examining the theories one by one. We begin with the simplest imaginable explanation of price stickiness, which posits the existence of nominal contracts that set prices in advance. If such contracts cover any substantial...

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Chapter 7: Implicit Contracts

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pp. 149-164

The implicit contract theory was originated by Costas Azariadis (1975), Martin Baily (1974), and Donald Gordon (1974) to explain wage rigidity. Their idea was that risk-neutral firms provide a form of insurance to their risk-averse workers by stabilizing wages in the...

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Chapter 8: Judging Quality by Price

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pp. 165-174

During the 1970s and 1980s, economic theorists increasingly turned their attention to the problems raised by imperfect information in markets and, in particular, to asymmetrically imperfect information- cases in which one party to a transaction is better informed...

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Chapter 9: Psychological Pricing Points

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pp. 175-185

The next theory tested in the survey did not emerge from the economic literature at all. It has its roots, instead, in the folklore of marketing and seems more closely related to psychologists' concept of "salience" than to economists' models of optimizing behavior...

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Chapter 10: Procyclical Elasticity of Demand

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pp. 186-196

According to the most naive view of the cyclical behavior of prices, marginal cost is an increasing function of output and price is equal to marginal cost. Hence prices should be pro cyclical, as indicated in a supply-demand diagram for a typical industry (see figure 10.1)...

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Chapter 11: Cost-Based Pricing: Lags from the Chain of Production

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pp. 197-210

That prices depend on costs hardly qualifies as a new idea. Nor does it, by itself, constitute a theory of price rigidity. It simply says that prices are sticky if costs-presumably marginal costs-are. Since costs primarily depend on other prices (including wages), this statement...

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Chapter 12: Constant Marginal Cost

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pp. 211-225

One simple theory of price rigidity begins by expressing the price of some representative firm in the following cumbersome way...

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Chapter 13: Costs of Adjusting Prices

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pp. 226-252

Among the simpler reasons why prices might be sticky is the idea that it is costly for firms to change their prices. Clearly, a profit-maximizing firm facing such adjustment costs will change its prices less often than an otherwise identical firm without such costs...

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Chapter 14: Hierarchy

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pp. 253-259

The hierarchy theory attributes price stickiness to delays in getting a large, hierarchical organization to act. If many people are required to "sign off" on a price change, prices may be incapable of changing rapidly in response to changes in the firm's environment...

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Chapter 15: Coordination Failure

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pp. 260-273

According to the coordination failure theory, price setting involves an important element of "following the crowd." Suppose demand in a particular industry rises, warranting an increase in relative price. An individual firm in that industry will certainly want to raise...

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Chapter 16: Inventories

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pp. 274-282

Many sellers of goods-but not of services-hold finished goods in inventory. Economists have long viewed such inventories as buffer stocks which firms can and do use to smooth fluctuations in production relative to those in sales. The presumed reason is that cost...

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Chapter 17: Nonprice Competition

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pp. 283-292

It is no accident that this book focuses exclusively on price behavior. Economists generally look upon prices as the principal vehicle used to clear markets and to allocate resources. In many conceptually simple-though perhaps technically dense-expositions of the...

Part IV: Wrapping Up

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pp. 293-294

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Chapter 18: What Have We Learned?

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pp. 295-314

Part III, one chapter for each theory, was tightly focused on the trees. It is now time to draw up a map of the forest-to put the research results into some perspective. In this concluding chapter, we highlight some things we have learned and mention some...

Appendix A

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pp. 315-336

Appendix B

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pp. 337-338

Notes

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pp. 339-360

Bibliography

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pp. 361-370

Index

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pp. 371-380


E-ISBN-13: 9781610440684
Print-ISBN-13: 9780871541215
Print-ISBN-10: 0871541211

Page Count: 336
Illustrations: 90 tables, 12 figures
Publication Year: 1998

Research Areas

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Subject Headings

  • Business cycles -- Mathematical models.
  • Prices -- Mathematical models.
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