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Asymmetric Price Adjustment in the Small: An Implication of Rational Inattention

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Author Info
Daniel Levy ()
Haipeng (Allen) Chang ()
Sourav Ray ()
Mark Bergen ()

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Abstract

We study the implications of rational inattention for individual price dynamics. Analyzing scanner data that cover 29 product categories over a eight-year period from a large Mid-western supermarket chain, we uncover a surprising regularity in the data--small price increases occur more frequently than small price decreases. We find that this asymmetry holds for price changes of up to about 15­30 cents (in absolute terms) and 3­10 percent (in relative terms). The asymmetry disappears for larger price changes. We document this finding for the entire data set, as well as for individual product categories considered. Moreover, we find that the asymmetry holds even when we exclude from the data the observations pertaining to inflationary periods. Given the inability of the existing theories to explain the particular form of asymmetry we document, we offer a new theory of asymmetric price adjustment, which can explain our findings. The theory, which is an extension of the literature on "rational inattention," argues that observing, processing, and reacting to price change information is not a costless activity. An important implication of rational inattention is that consumers may rationally choose to ignore--and thus not to respond to--small price changes, creating a "range of inattention" along the demand curve. This range of consumer inattention, we argue, gives the retailers incentive for asymmetric price adjustment "in the small." These incentives, however, disappear for large price changes, because large price changes are noticed by consumers and therefore trigger their response. Thus, no asymmetry is observed "in the large."

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Paper provided by Utrecht School of Economics in its series Working Papers with number 04-23.

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Length: 50 pages
Date of creation: Jul 2004
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Handle: RePEc:use:tkiwps:0423

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Related research
Keywords: Asymmetric Price Adjustment; Rational Inattention; Cost and Benefit of Information Acquiring and Processing; Price Rigidity;

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
M31 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Marketing

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Emmanuel Dhyne & Catherine Fuss & Hashem Pesaran & Patrick Sevestre, 2006. "Lumpy price adjustments : a microeconometric analysis," Research series 200610-12, National Bank of Belgium. [Downloadable!]
    Other versions:
  2. Jerzy D. Konieczny, 2006. "Discussion of: Lumpy Price Adjustments: A Microeconometric Analysis," Working Papers jk0035, Wilfrid Laurier University, Department of Economics, revised 1970. [Downloadable!]
  3. Babutsidze, Zakaria, 2006. "(S,s) Pricing: Does the Heterogeneity Wipe Out the Asymmetry on Micro Level?," UNU-MERIT Working Paper Series 033, United Nations University, Maastricht Economic and social Research and training centre on Innovation and Technology. [Downloadable!]
  4. Levy, Daniel & Young, Andrew, 2004. "The Real Thing: Nominal Price Rigidity of the Nickel Coke, 1886–1959," MPRA Paper 1046, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  5. Mark Bergen & Daniel Levy & Sourav Ray & Paul Rubin & Benjamin Zeliger, 2004. "When Little Things Mean a Lot: On the Inefficiency of Item Pricing Laws," Emory Economics 0404, Department of Economics, Emory University (Atlanta). [Downloadable!]
    Other versions:
  6. Azar, Ofer H., 2006. "Behavioral industrial organization, firm strategy, and consumer economics," MPRA Paper 4484, University Library of Munich, Germany. [Downloadable!]
  7. Michael Ehrmann, 2006. "Rational inattention, inflation developments and perceptions after the euro cash changeover," Working Paper Series 588, European Central Bank. [Downloadable!]
  8. James Yetman, 2009. "Hong Kong Consumer Prices are Flexible," Working Papers 052009, Hong Kong Institute for Monetary Research. [Downloadable!]
  9. Hansen, Kristin & Loy, Jens-Peter, 2007. "Multiproduct Food Retail Sales: A Case Study for Germany," 2007 1st Forum, February 15-17, 2007, Innsbruck, Austria 6568, International European Forum on Innovation and System Dynamics in Food Networks. [Downloadable!]
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