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The importance of attractive prices in pricing dynamics

  • Aalto-Setälä , Ville

    (Bank of Finland, National Consumer Research Center)

  • Schindler, Robert

    (Rutgers University, Camden)

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    Nominal rigidities have an important role in macro models used for the analysis of monetary policy. Re-cently, attractive prices (also known as price points) have often been referred to as one important potential explanation of nominal rigidities. An increased interest on attractive prices as an explanation for price ri-gidities rests on online pricing, in the context of which it has been shown that prices are rigid also on the internet, where physical costs are not important. Our empirical analyses using micro data on consumer prices in Finland indicate that a specific form of attractive prices – 9-ending prices – have a considerable effect on pricing dynamics. The results of the study show that changes to prices with 9 endings are more often decreases than are changes to prices with other endings. Price changes to 9-ending prices are also of smaller size than are changes to other endings.

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    Paper provided by Bank of Finland in its series Research Discussion Papers with number 30/2006.

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    Length: 32 pages
    Date of creation: 30 Nov 2006
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2006_030
    Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
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    1. Chakrabarti, Rajesh & Scholnick, Barry, 2005. "Nominal rigidities without literal menu costs: evidence from E-commerce," Economics Letters, Elsevier, vol. 86(2), pages 187-191, February.
    2. Anil K Kashyap, 1994. "Sticky Prices: New Evidence from Retail Catalogs," NBER Working Papers 4855, National Bureau of Economic Research, Inc.
    3. Gordon, Robert J, 1990. "What Is New-Keynesian Economics?," Journal of Economic Literature, American Economic Association, vol. 28(3), pages 1115-71, September.
    4. Álvarez, L. & Dias, D. & Dhyne, E. & Hoffmann, J. & Jonker, N. & Le Bihan, H. & Lünnemann, P. & Rumler, F. & Veronese, G. & Vilmunen, J., 2005. "Price Setting in the Euro Area: Some Stylized Facts from Individual Consumer Price Data," Working papers 136, Banque de France.
    5. Jonathan L. Willis, 2003. "Implications of structural changes in the U.S. economy for pricing behavior and inflation dynamics," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 5-27.
    6. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    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. Basu, Kaushik, 1997. "Why are so many goods priced to end in nine? And why this practice hurts the producers," Economics Letters, Elsevier, vol. 54(1), pages 41-44, January.
    9. Barro, Robert J, 1972. "A Theory of Monopolistic Price Adjustment," Review of Economic Studies, Wiley Blackwell, vol. 39(1), pages 17-26, January.
    10. Sheshinski, Eytan & Weiss, Yoram, 1983. "Optimum Pricing Policy under Stochastic Inflation," Review of Economic Studies, Wiley Blackwell, vol. 50(3), pages 513-29, July.
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