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Hierarchical delays as a source of nominal price rigidities: evidence from the microcomputer industry

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Author Info
Michael J. Hicks (Miller College of Business, Ball State University, Muncie, Indiana, USA)

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Abstract

The non-market clearing models of New Keynesian macroeconomic theory rely heavily upon sticky prices to generate business cycle activity following monetary shocks. The dominant theoretical explanations for sticky prices assume a degree of market power in the representative firm (e.g. Mankiw, 1985. Quarterly J. Econ. 100(2): 529-538). Thus, an important element of empirical research is the exploration of sticky prices within more competitive industries. The importance of this analysis is in establishing the potential degree of price stickiness in a representative firm employed in a macroeconomic model. Among the many theoretical explanations of nominal rigidities are the existence of hierarchical delays (Blinder, 1991. Amer. Econ. Rev. 72: 334-348) and decision costs (Tommasi, 1992. Optimal Pricing, Inflation, And The Cost of Price Adjustment, 485-511). Both theories rely on the simple notion that managerial inefficiency, high costs of making decisions and sluggish transmission of information lead to price stickiness. This paper investigates the market for microcomputers in the United States from 1993 to 1995 finding strong evidence of nominal price rigidities attributable to hierarchical delays. Alternate explanations for these rigidities are explored and rejected. These prices are sticky in a monopolistically or workably competitive industry, which provides important additional support for the New Keynesian interpretation. Ordinary least squares, a Poisson count and negative binomial count models are employed in establishing the existence of hierarchical delays. Conclusions are offered regarding the appropriate selection of the characteristics of the representative firm in macroeconomic models. Copyright © 2007 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/mde.1371
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Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 28 (2007)
Issue (Month): 7 ()
Pages: 803-815
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Handle: RePEc:wly:mgtdec:v:28:y:2007:i:7:p:803-815

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  1. Oliver E. Williamson, 1967. "Hierarchical Control and Optimum Firm Size," Journal of Political Economy, University of Chicago Press, vol. 75, pages 123. [Downloadable!] (restricted)
  2. Mariano Tommasi, 1992. "Inflation and Relative Prices Evidence from Argentina," UCLA Economics Working Papers 661, UCLA Department of Economics. [Downloadable!]
  3. Laurence Ball & David Romer, 1989. "The Equilibrium and Optimal Timing of Price Changes," NBER Working Papers 2412, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Shapiro, Matthew D, 1987. "Are Cyclical Fluctuations in Productivity Due More to Supply Shocks or Demand Shocks?," American Economic Review, American Economic Association, vol. 77(2), pages 118-24, May. [Downloadable!] (restricted)
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  5. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 349-89, April. [Downloadable!] (restricted)
  6. Cameron, A. Colin & Trivedi, Pravin K., 1990. "Regression-based tests for overdispersion in the Poisson model," Journal of Econometrics, Elsevier, vol. 46(3), pages 347-364, December. [Downloadable!] (restricted)
  7. Mankiw, N Gregory, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 529-38, May. [Downloadable!] (restricted)
  8. Allen, Franklin, 1988. "A Theory of Price Rigidities when Quality is Unobservable," Review of Economic Studies, Blackwell Publishing, vol. 55(1), pages 139-51, January. [Downloadable!] (restricted)
  9. Lach, Saul & Tsiddon, Daniel, 1996. "Staggering and Synchronization in Price-Setting: Evidence from Multiproduct Firms," American Economic Review, American Economic Association, vol. 86(5), pages 1175-96, December. [Downloadable!] (restricted)
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  10. Blinder, Alan S, 1982. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," American Economic Review, American Economic Association, vol. 72(3), pages 334-48, June. [Downloadable!] (restricted)
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  11. Granger, Clive W. J. & King, Maxwell L. & White, Halbert, 1995. "Comments on testing economic theories and the use of model selection criteria," Journal of Econometrics, Elsevier, vol. 67(1), pages 173-187, May. [Downloadable!] (restricted)
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  12. Mark Bils, 1989. "Cyclical Pricing of Durable Goods," NBER Working Papers 3050, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, vol. 76(4), pages 637-58, September. [Downloadable!] (restricted)
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  14. Ball, Laurence & Romer, David, 1991. "Sticky Prices as Coordination Failure," American Economic Review, American Economic Association, vol. 81(3), pages 539-52, June. [Downloadable!] (restricted)
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  1. Daniel Levy, 2007. "Price rigidity and flexibility: new empirical evidence," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 639-647. [Downloadable!]
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