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Sunday, September 01, 2013

'Limited Time Offer! Temporary Sales and Price Rigidities'

Are prices rigid? (For background and a discussion of previous evidence on price rigidity at both aggregated and disaggregated levels, see this post.) This is via Carola Binder:

Limited Time Offer! Temporary Sales and Price Rigidities: Even though prices change frequently, this does not necessarily mean that prices are very flexible, according to a new paper by Eric Anderson, Emi Nakamura, Duncan Simester, and Jón Steinsson. In "Informational Rigidities and the Stickiness of Temporary Sales," these authors note that it is important to distinguish temporary sales from regular price changes when analyzing the frequency of price adjustment and the response of prices to macroeconomic shocks.
"The literature on price rigidity can be divided into a literature on "sticky prices" and a literature on "sticky information" (which gives rise to sticky plans). A key question in interpreting the extremely high frequencies of price change observed in retail price data is whether these frequent price changes facilitate rapid responses to changing economic conditions, or whether some of these price changes are part of “sticky plans” that are determined substantially in advance and therefore not responsive to changing conditions. ...
They provide some interesting institutional features of temporary sales and promotions...
They conclude that regular (non-sale) prices exhibit stickiness, while temporary sale prices follow "sticky plans" that are relatively unresponsive in the short run to macroeconomic shocks:
"Our analysis suggests that regular prices are sticky prices that change infrequently but are responsive to macroeconomic shocks, such as the rapid run-up and decline of oil prices. In contrast, temporary sales follow sticky plans. These plans include price discounts of varying depth and frequency across products. But, the plans themselves are relatively unresponsive in the near term to macroeconomic shocks. We believe that this characterization of regular and sale prices as sticky prices versus sticky plans substantially advances an ongoing debate about the extent of retail price fluctuations and offers deeper insight into how retail prices adjust in response to macroeconomic shocks."

    Posted by on Sunday, September 1, 2013 at 04:20 PM in Academic Papers, Economics | Permalink  Comments (6)


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