IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Price Stickiness in Customer Markets with Reference Prices

  • Nicolas Vincent

Price rigidity is often modeled by assuming that firms face a fixed cost of price change. However, in surveys, firms report that the main reason they wish to keep prices stable is for fear of antagonizing customers. Moreover, marketing studies show that most consumers engage in very little product comparison on a typical shopping trip. In this paper, we explore the implications of these observations for price rigidity. In our model, comparing prices and characteristics of alternative brands is time-consuming. While some consumers behave as bargain hunters with zero opportunity cost form shopping, most are loyal to firms as long as posted prices are not raised. A price increase is interpreted as a signal that a better alternative may be available and triggers consumer search. Firms do not face menu costs and are free to change nominal prices, but understand that their pricing decisions will affect their customer base and hence future profits. We show that this micro-founded mechanism is akin to a nominal rigidity and naturally generates price stickiness. It is also compatible with the observation of frequent sales at the retail level and can rationalize the decreasing or flat hazard functions observed empirically.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2012/CIRPEE12-30.pdf
Download Restriction: no

Paper provided by CIRPEE in its series Cahiers de recherche with number 1230.

as
in new window

Length:
Date of creation: 2012
Date of revision:
Handle: RePEc:lvl:lacicr:1230
Contact details of provider: Postal: CP 8888, succursale Centre-Ville, Montréal, QC H3C 3P8
Phone: (514) 987-8161
Web page: http://www.cirpee.org/

More information through EDIRC

References listed on IDEAS
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.:

as in new window
  1. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  2. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  3. Isaac Kleshchelski & Nicolas Vincent, 2007. "Market Share and Price Rigidity," Cahiers de recherche 08-01, HEC Montréal, Institut d'économie appliquée.
  4. Bartosz Mackowiak & Mirko Wiederholt, 2004. "Optimal Sticky Prices under Rational Inattention," SFB 649 Discussion Papers SFB649DP2005-040, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany, revised Jul 2005.
  5. Etienne Gagnon, 2006. "Price Setting during Low and High Inflation: Evidence from Mexico," 2006 Meeting Papers 300, Society for Economic Dynamics.
  6. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, vol. 76(4), pages 637-58, September.
  7. Patrick J. Kehoe & Virgiliu Midrigan, 2010. "Prices are Sticky After All," NBER Working Papers 16364, National Bureau of Economic Research, Inc.
  8. Apel, Mikael & Friberg, Richard & Hallsten, Kerstin, 2005. "Microfoundations of Macroeconomic Price Adjustment: Survey Evidence from Swedish Firms," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 313-38, April.
  9. Mankiw, N. Gregory & Reis, Ricardo, 2002. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Scholarly Articles 3415324, Harvard University Department of Economics.
  10. Jean-Robert Tyran & Elke Renner, 2003. "Price Rigidity in Customer Markets," University of St. Gallen Department of Economics working paper series 2003 2003-16, Department of Economics, University of St. Gallen.
  11. Briesch, Richard A, et al, 1997. " A Comparative Analysis of Reference Price Models," Journal of Consumer Research, University of Chicago Press, vol. 24(2), pages 202-14, September.
  12. Nakamura, Emi & Steinsson, Jón, 2011. "Price setting in forward-looking customer markets," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 220-233.
  13. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November.
  14. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
  15. David M. Arseneau & Sanjay K. Chugh, 2007. "Bargaining, fairness, and price rigidity in a DSGE environment," International Finance Discussion Papers 900, Board of Governors of the Federal Reserve System (U.S.).
  16. Rotemberg, Julio J., 2005. "Customer anger at price increases, changes in the frequency of price adjustment and monetary policy," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 829-852, May.
  17. Sam Peltzman, 1998. "Prices Rise Faster Than They Fall," University of Chicago - George G. Stigler Center for Study of Economy and State 142, Chicago - Center for Study of Economy and State.
  18. Martin Eichenbaum & Nir Jaimovich & Sergio Rebelo, 2011. "Reference Prices, Costs, and Nominal Rigidities," American Economic Review, American Economic Association, vol. 101(1), pages 234-62, February.
  19. Matthew S. Lewis & Howard P. Marvel, 2011. "When Do Consumers Search?," Journal of Industrial Economics, Wiley Blackwell, vol. 59(3), pages 457-483, 09.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:lvl:lacicr:1230. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Johanne Perron)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.