We examine retail and wholesale prices for a large supermarket chain over seven and one-half years. We find that prices fall on average during seasonal demand peaks for a product, largely due to changes in retail margins. Retail margins for specific goods fall during peak demand periods for that good, even if these periods do not coincide with aggregate demand peaks for the retailer. This is consistent with "loss-leader" models of retailer competition. Models stressing cyclical demand elasticities or cyclical firm conduct are less consistent with our findings. Manufacturer behavior plays a limited role in the countercyclicality of prices. (JEL L13, E32, L81) In a standard perfectly competitive model of price determination, positive demand shocks result in either no change or an increase in prices. There is a growing body of evidence that retail prices do not obey the standard model and that prices fall in periods of high total demand. Elizabeth J. Warner and Robert B. Barsky (1995) provide evidence that prices of consumer appliances fall in the Christmas holiday period.

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Why Don't Prices Rise During Periods of Peak Demand? Evidence from Scanner Data

This article presents and tests a model of gift selection based on cognitive consistency theories. The model, which is supported by the data presented, offers a means for predicting the conditions under which giver tastes or recipient tastes dominate gift selection, and for predicting the amount of satisfaction which the gift brings the giver.

It's the thought that counts : a signed digraph analysis of gift-giving / BEBR No. 314

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On Sticky Prices: Academic Theories Meet the Real World

This paper documents the patterns and determinants of price setting in the Belgian industry. We analyse the micro data underlying the Producer Price Index (PPI) over the period February 2001 to January 2005. On average only one out of four prices changes in a typical month, while the absolute size of a price change amounts to 6%. The frequencies of price adjustment are particularly heterogeneous across sectors, which is determined by heterogeneity in the market and cost structure. We find no signs of downward nominal rigidity. A joint analysis of sizes and frequencies of price adjustment across time shows that price setting is characterised by both time- and state-dependent pricing. About 38% of the exported goods are affected by pricing to market.

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The Patterns and Determinants of Price Setting in the Belgian Industry

This paper contributes to the empirical literature on price stickiness by documenting a high rate of nominal rigidity among housing rents in the United States between 1974 and 1981. Of the units studied, 29% had no change in nominal rents from year to year. The incidence was much higher (a) in years and cities with a low median nominal rent growth rate, and among (b) units whose tenants continued from the previous year and (c) units in small buildings. A little less than half of the nominal rigidity can be ascribed to grid pricing. Possible explanations, as well as the likely distributive and allocative implications, are discussed.

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The nominal rigidity of apartment rents

The Thanksgiving-Christmas holiday period is a major sales period for US retailers. Due to higher store traffic, tasks such as restocking shelves, handling customers’ questions and inquiries, running cash registers, cleaning, and bagging, become more urgent during holidays. As a result, the holiday-period opportunity cost of price adjustment may increase dramatically for retail stores, which should lead to greater price rigidity during holidays. We test this prediction using weekly retail scanner price data from a major Midwestern supermarket chain. We find that indeed, prices are more rigid during holiday periods than non-holiday periods. For example, the econometric model we estimate suggests that the probability of a price change is lower during holiday periods, even after accounting for cost changes. Moreover, we find that the probability of a price change increases with the size of the cost change, during both, the holiday as well as non-holiday periods. We argue that these findings are best explained by higher price adjustment costs (menu cost) the retailers face during the holiday periods. Our data provides a natural experiment for studying variation in price rigidity because most aspects of market environment such as market structure, industry concentration, the nature of long-term relationships, contractual arrangements, etc., do not vary between holiday and nonholiday periods. We, therefore, are able to rule out these commonly used alternative explanations for the price rigidity, and conclude that the menu cost theory offers the best explanation for the holiday period price rigidity.

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Haipeng Allan Chen

Papers

Holiday Price Rigidity and Cost of Price Adjustment