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

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  • Edward S. Knotek

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.

Suggested Citation

  • Edward S. Knotek, 2005. "Convenient prices, currency, and nominal rigidity : theory with evidence from newspaper prices," Research Working Paper RWP 05-11, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:rwp05-11
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    Citations

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    Cited by:

    1. Daniel Levy & Dongwon Lee & Haipeng (Allan) Chen & Robert J. Kauffman & Mark Bergen, 2011. "Price Points and Price Rigidity," The Review of Economics and Statistics, MIT Press, vol. 93(4), pages 1417-1431, November.
    2. Levy, Daniel & Snir, Avichai, 2017. "Potterian Economics," MPRA Paper 76344, University Library of Munich, Germany.
    3. repec:hrv:faseco:33907956 is not listed on IDEAS
    4. Michael Weber, 2014. "Nominal Rigidities and Asset Pricing," 2014 Meeting Papers 53, Society for Economic Dynamics.
    5. Edward S. Knotek, 2010. "The roles of price points and menu costs in price rigidity," Research Working Paper RWP 10-18, Federal Reserve Bank of Kansas City.
    6. repec:eee:jmacro:v:52:y:2017:i:c:p:252-267 is not listed on IDEAS
    7. 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.
    8. Lee, Manjong, 2010. "Carrying cost of money and real effects of denomination structure," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 326-337, March.
    9. repec:eee:ecmode:v:69:y:2018:i:c:p:38-48 is not listed on IDEAS
    10. Edward S. Knotek, 2011. "Convenient Prices and Price Rigidity: Cross-Sectional Evidence," The Review of Economics and Statistics, MIT Press, vol. 93(3), pages 1076-1086, August.
    11. Tschoegl, Adrian E., 2010. "The international diffusion of an innovation: The spread of decimal currency," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 39(1), pages 100-109, January.
    12. Volker Hahn & Michal Marencak, 2018. "Price Points and Price Dynamics," Working Paper Series of the Department of Economics, University of Konstanz 2018-01, Department of Economics, University of Konstanz.
    13. Ward, Felix & Chen, Yao, 2016. "Rigid relations: External adjustment under the Gold Standard (1880-1913)," Annual Conference 2016 (Augsburg): Demographic Change 145930, Verein für Socialpolitik / German Economic Association.
    14. repec:rim:rimwps:04-07 is not listed on IDEAS
    15. 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.
    16. Bouhdaoui, Y. & Bounie, D. & François, A., 2014. "Convenient prices, cash payments and price rigidity," Economic Modelling, Elsevier, vol. 41(C), pages 329-337.

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    Keywords

    Prices ; Newspapers;

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