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Rigid Prices: Evidence from US scanner data

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  • Ben Eden
  • Jeff Campbell

Abstract

This paper is part of the growing literature that uses micro-data to distinguish among alternative price behavior models and provide some measurements essential for calibration exercises. We use weekly grocery US scanner data and attempt to distinguish among three types of models: State dependent menu cost models, time dependent sticky price models and sequential trade models. Our main findings are: 1. The probability that a store will change its price is increasing in the distance from the mean price charged by other stores and is decreasing in the time since the last price change; 2. The time between price changes is negatively autocorrelated; 3. There is a positive relationship between the standard deviation of transaction prices (across units) and the surprise in sales. State dependent menu cost models say that only the level of the real price matters. Our first finding is that the probability of repricing does depend on the relative price but unlike the prediction of the theory other variables also matter. State dependent models suggest that stores whose (S,s) band is relatively wide will make large nominal price jumps relatively infrequently. This suggests that the time between price changes should exhibit positive serial correlation. We actually find a negative autocorrelation. Time dependent models assume that a store change its price every N periods. This suggests that the probability of making a price change should increase with the time since the last change. We find that the probability actually decreases with the time since the last change. The uncertain and sequential trade model says that when the realization of demand is low only low priced goods are sold, but when the realization of demand is high both low priced and high priced goods are sold. This suggests a positive relationship between the standard deviation of transaction prices (across units) and the surprise in the number of units sold. The correlations in the data are consistent with this prediction.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 461.

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Date of creation: 2004
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Handle: RePEc:red:sed004:461

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Related research

Keywords: Price rigidity; time dependent strategy; state dependent strategy;

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References

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  1. Peter E. Rossi & Judith A. Chevalier & Anil K. Kashyap, 2002. "Why Don't Prices Rise During Periods of Peak Demand? Evidence from Scanner Data," Yale School of Management Working Papers ysm291, Yale School of Management.
  2. Emmanuel Dhyne & Luis J. Álvarez & Hervé Le Bihan & Giovanni Veronese & Daniel Dias & Johannes Hoffmann & Nicole Jonker & Patrick Lünnemann & Fabio Rumler & Jouko Vilmunen, 2005. "Price setting in the euro area: Some stylized facts from Individual Consumer Price Data," Working Paper Research 74, National Bank of Belgium.
  3. Eyal Baharad & Benjamin Eden, 2004. "Price Rigidity and Price Dispersion: Evidence from Micro Data," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 613-641, July.
  4. Peter J. Klenow & Oleksiy Kryvtsov, 2005. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," Working Papers 05-4, Bank of Canada.
  5. Michael R. Darby & John Haltiwanger & Mark Plant, 1984. "Unemployment-Rate Dynamics and Persistent Unemployment Under RAtional Expectations," UCLA Economics Working Papers 339, UCLA Department of Economics.
  6. Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
  7. Sheshinski, Eytan & Weiss, Yoram, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Wiley Blackwell, vol. 44(2), pages 287-303, June.
  8. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
  9. Robert Lucas & Mike Golosov, 2004. "Menu Costs and Phillips Curves," 2004 Meeting Papers 144, Society for Economic Dynamics.
  10. 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.
  11. Kashyap, Anil K, 1995. "Sticky Prices: New Evidence from Retail Catalogs," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 245-74, February.
  12. Caplin, Andrew S & Spulber, Daniel F, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 703-25, November.
  13. Caplin, Andrew & Leahy, John, 1991. "State-Dependent Pricing and the Dynamics of Money and Output," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 683-708, August.
  14. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  15. Konieczny, Jerzy D. & Skrzypacz, Andrzej, 2005. "Inflation and price setting in a natural experiment," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 621-632, April.
  16. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  17. J. David Richardson, 2003. "Scanner Indexes for the Consumer Price Index," NBER Chapters, in: Scanner Data and Price Indexes, pages 39-66 National Bureau of Economic Research, Inc.
  18. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing And The General Equilibrium Dynamics Of Money And Output," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 655-690, May.
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