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The Roles of Price Points and Menu Costs in Price Rigidity

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  • Edward Knotek II

    (Federal Reserve Bank of Cleveland)

Abstract

Macroeconomic models often generate nominal price rigidity via menu costs. This paper provides empirical evidence that treating menu costs as a structural explanation for sticky prices may be spurious. Using scanner data, I note two empirical facts: (1) price points, embodied in nine-ending prices, account for approximately two-thirds of prices; (2) at the conclusion of sales, post-sale prices return to their pre-sale levels more than three-fourths of the time. I construct a model that nests roles for menu costs and price points and estimate model variants via simulated method of moments. Excluding the two facts yields a statistically and economically significant role for menu costs in generating price rigidity. Incorporating the two facts yields an incentive to set nine-ending prices two orders of magnitude larger than the menu costs in this model. In this setting, the price point model can match the two stylized facts, but menu costs are effectively irrelevant as a source of price rigidity. The choice of a mechanism for price rigidity matters for aggregate dynamics.

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  • Edward Knotek II, 2016. "The Roles of Price Points and Menu Costs in Price Rigidity," 2016 Meeting Papers 1563, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:1563
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    1. Price points, good diversity and price rigidity
      by Economic Logician in Economic Logic on 2011-02-17 21:17:00

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    Cited by:

    1. Snir, Avichai & Chen, Haipeng (Allan) & Levy, Daniel, 2022. "Zero-Ending Prices, Cognitive Convenience, and Price Rigidity," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, issue Forthcomi, pages 1-39.
    2. Levy, Daniel & Snir, Avichai & Gotler, Alex & Chen, Haipeng (Allan), 2020. "Not all price endings are created equal: Price points and asymmetric price rigidity," Journal of Monetary Economics, Elsevier, vol. 110(C), pages 33-49.
    3. Richard Davies, 2021. "Prices and inflation in the UK - A new dataset," CEP Occasional Papers 55, Centre for Economic Performance, LSE.
    4. Edward S. Knotek & Doron Sayag & Avichai Snir, 2019. "The Effects of Price Endings on Price Rigidity: Evidence from VAT Changes," Working Papers 19-24, Federal Reserve Bank of Cleveland.
    5. Ray, Sourav & Snir, Avichai & Levy, Daniel, 2023. "Retail Pricing Format and Rigidity of Regular Prices," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, pages 1-1.
    6. Snir, Avichai & Levy, Daniel, 2021. "If You Think 9-Ending Prices Are Low, Think Again," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 6(1 (Forthc).
    7. Erwan Gautier & Ronan Le Saout, 2015. "The Dynamics of Gasoline Prices: Evidence from Daily French Micro Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(6), pages 1063-1089, September.
    8. Hahn, Volker & Marenčák, Michal, 2020. "Price points and price dynamics," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 127-144.
    9. Erwan Gautier & Ronan Le Saout, 2015. "L'ajustement microéconomique des prix des carburants en France," Working Papers hal-01195759, HAL.

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    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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; Personnel Economics - - Marketing and Advertising - - - Marketing

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