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Convenient prices, currency, and nominal rigidity : theory with evidence from newspaper prices

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  • Edward S. Knotek II

Abstract

Newspapers, movie tickets, and concession stand items typically charge prices that facilitate rapid, simple transactions: their prices often coincide with available monetary units, require few pieces of money, or require little change. In this sense, these prices are more convenient than other proximate prices. I model a firm that explicitly incorporates convenience into its pricing decisions, where convenience is quantified by the number of currency units in a transaction. The model illustrates how alternating periods of price rigidity and flexibility can arise in such a setting, along with rapid switching between convenient prices. I compile time series data on newspaper cover prices and use simulations to show that convenience is an essential component of these prices. In the empirical data, firms set prices that were more convenient than adjacent prices 61% of the time. Standard menu costs cannot replicate this behavior. Because convenience appears to affect many of the consumer goods and services with the stickiest prices in the U.S. economy, studies focusing on very sticky prices must be cognizant of convenience’s role in effecting above-average price rigidity.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 05-11.

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Date of creation: 2005
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Handle: RePEc:fip:fedkrw:rwp05-11

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Keywords: Prices ; Newspapers;

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Cited by:
  1. Levy, Daniel & Lee, Dongwon & Chen, Haipeng (Allan) & Kauffman, Robert & Bergen, Mark, 2007. "Price Points and Price Rigidity," MPRA Paper 1472, University Library of Munich, Germany.
  2. Edward S. Knotek II, 2008. "Convenient prices and price rigidity: cross-sectional evidence," Research Working Paper RWP 08-04, Federal Reserve Bank of Kansas City.
  3. Alan Kackmeister, 2007. "Yesterday's Bad Times Are Today's Good Old Times: Retail Price Changes Are More Frequent Today Than in the 1890s," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 1987-2020, December.
  4. Michel Beine & Étienne Farvaque, 2011. "Clause de non-renouvellement et rigidité des prix. Résultats sur le secteur de l'édition en France," Revue économique, Presses de Sciences-Po, vol. 62(1), pages 57-66.
  5. Lee, Manjong, 2010. "Carrying cost of money and real effects of denomination structure," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 326-337, March.
  6. Edward S. Knotek II, 2010. "The roles of price points and menu costs in price rigidity," Research Working Paper RWP 10-18, Federal Reserve Bank of Kansas City.
  7. Tschoegl, Adrian E., 2010. "The international diffusion of an innovation: The spread of decimal currency," The Journal of Socio-Economics, Elsevier, vol. 39(1), pages 100-109, January.

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