Infrequent Price Research Articles

Examination of Consumers’ Perceived Quality and Willingness to Buy in the Context of Price Variability and Frequency of Price Change: A Study of Retail Products

Marketing managers are able to influence consumers' perceptions of quality and their willingness to buy, using the frequency of price changes and price variability. This study aims to examine the differences in the frequency of price changes and price varia- bility, in terms of the perceived quality and the willingness to buy. For this purpose, using values calculated according to the average and standard deviation of the market price of a specified product, we obtained two different price variations, ±1σ and ±2σ, and price stim- uli determined at two different frequencies of price changes (three and seven times were considered), which resulted in four different participant groups. At the end of the study, a statistically significant difference was only found between consumers in the low price var- iability and infrequent price change condition and consumers in the high price variability and infrequent price change condition, in terms of the perceived quality.

Dynamic Stability of Post-Keynesian Pricing

AbstractConventional economic theory assumes a Walrasian pricing mechanism that is known to pose theoretical difficulties. Less well-known is that conventional price theory conflicts with empirical studies of price-setting in industrial firms. Post-Keynesian theory, which assumes mark-up pricing on normal costs and infrequent price changes, is consistent with observation, and we show in this paper that post-Keynesian pricing, unlike conventional pricing, features stable dynamics. We focus on the short run, because post-Keynesian theory posits complex and historically-contingent long-term price dynamics. Specifically, we show that under very general conditions, prices converge to a unique equilibrium price vector.

Impact of Virtual Bidding on Forward Premia in the California Independent System Operator

In the California wholesale electricity market, physical power is sold competitively in a multi-unit multi-settlement single-price auction comprised of a day-ahead forward market and a real-time spot market. Historically, significant divergences have arisen between forward and spot prices, leading to market inefficiencies. In 2011, the California Independent System Operator implemented virtual bidding as a partial solution to converge prices between markets by opening the forward market to financial speculators without any ties to physical generation or load. Using 5 years of data between April 2009 and March 2014, I estimate hourly time-series models of the system-wide forward premium, and forward premia at the two largest trading hubs. I find virtual bids and off ers to have had no effect on the forward premia during off -peak hours. During peak hours, I find virtual bidding to have caused forward and spot prices to diverge due to the large number of market participants looking to hedge against — or speculate on — the occurrence of infrequent but large spot price spikes by placing virtual demand bids. Virtuals placed at the largest trading hubs were associated with even larger price divergences, suggesting virtual demand bids also distorted the price of congestion and losses at the nodal level.

Monetary policy for rationally inattentive economies with staggered price setting

The paper examines the optimal monetary policy when firms are constrained by information processing capability and infrequent price adjustments. Firms' information processing limit gives rise to imperfect knowledge about macroeconomic aggregates and endogenous information learning contingent on the monetary policy. Staggered price setting introduces the observed price duration and additional policy tradeoffs resulting from the interactions between nominal rigidities and imperfect information processing. The integrated model implies an optimal policy that commits to complete price stabilization in response to natural rate shocks but not in response to markup shocks. In the presence of markup shocks, it is optimal for the central bank to focus on price stabilization in the initial periods following markup shocks and shifts the emphasis to output gap stabilization later. Moreover, larger information capacity, stronger complementarities and more persistent shocks require more aggressive price stabilization in the short-run.

Early Contract Renegotiation: An Analysis of US Labor Contracts, 1970–1995

This article examines the ex post flexibility of US labor contracts during the 1970–95 period by investigating whether unanticipated changes in inflation increase the likelihood of a contract being renegotiated prior to its expiration. We find empirical support for this hypothesis. Specifically, our results indicate that renegotiations are triggered principally by large and infrequent price shocks of either sign. When combined with evidence that ex ante contract durations are shorter during episodes of increased inflation uncertainty, our results suggest that these contracts are flexible both ex ante and ex post to changes in the evolution of inflation.

State-dependent pricing and the non-neutrality of money

Golosov and Lucas (2007) have challenged the view that infrequent price adjustments by firms explain why money has aggregate real output effects. The basis of their challenge is the ‘selection effect’ – re-setting firms are not selected at random, they are those firms whose prices are furthest from the optimal reset price. Because of this the aggregate price level is sufficiently flexible for monetary neutrality. In this paper I add price review costs to an otherwise standard Golosov and Lucas model. This weakens the selection effect and restores monetary non-neutrality.

Price Rigidity and Strategic Uncertainty

The phenomenon of infrequent price changes has troubled economists for decades. Intuitively one feels that for most price-setters there exists a range of inaction, i.e., a substantial measure of the states of the world, within which they do not wish to modify prevailing prices. Economists wishing to maintain rationality of price-setters resorted to fixed price adjustment costs as an explanation for price rigidity. This paper proposes an alternative explanation, without recourse to any sort of physical adjustment cost, by putting strategic interaction into the center-stage of the analysis. Price-making is treated as a repeated oligopoly game. The traditional analysis of these games cannot pinpoint any equilibrium as a reasonable “solution” of the strategic situation. Thus, decision-makers have a genuine strategic uncertainty about the strategies of other decision-makers. Hesitation may lead to inaction. To model this situation, the authors follow the style of agent-based models, by modeling firms that change their pricing strategies following an evolutionary algorithm. In addition to reproducing the known negative relationship between price rigidity and the level of general inflation, the model exhibits several features observed in real data. Moreover, most prices fall into the theoretical “range” without explicitly building this property into strategies.

Early Contract Renegotiation: An Analysis of U.S. Labor Contracts from 1970 to 1995

Abstract This paper examines the ex post flexibility of U.S. labor contracts during the 1970-95period by investigating whether unanticipated changes in inflation increase the likelihoodof a contract being renegotiated prior to its expiration. We find strong empirical supportfor this hypothesis. Specifically, our results indicate that renegotiations are triggeredprincipally by large and infrequent price shocks of either sign. When combined withevidence that ex ante contract durations are shorter during episodes of increased inflationuncertainty, our results suggest that these contracts are flexible both ex ante and ex post tochanges in the evolution of inflation. Key words: labor contract, early renegotiation Rich, Tracy: Federal Reserve Bank of New York (e-mail: robert.rich@ny.frb.org,joseph.tracy@ny.frb.org). The authors thank Evan LeFlore for excellent research assistance andLeif Danziger for helpful comments. The views expressed in this paper are those of the authorsand do not necessarily reflect the position of the Federal Reserve Bank of New York or the FederalReserve System.

The case for a new capacity mechanism in the UK electricity market—Lessons from Australia and New Zealand

The UK Government plans a capacity mechanism to ensure sufficient reserves as the share of intermittent generation increases. This article reviews the use of last resort capacity mechanisms in two other energy-only markets, Australia and New Zealand.The Australian National Electricity Market has infrequent price spikes up to A$12,500 (£7800)/MWh. Option contracts have supported significant investment in peak capacity. The system operator also has an ability to contract reserve up to 9 months before projected shortfalls. Reserve has been contracted on two occasions but never dispatched.The New Zealand electricity market includes a reserve energy scheme which allows the system operator to contract and dispatch reserve capacity. One plant has been contracted under the scheme. The plant is currently offered into the market at NZ$5000 (£2300)/MWh.In both markets there have been concerns that reserve schemes could reduce the frequency of high prices and damage price signals for peak investment. Following a Ministerial review in 2009 the New Zealand scheme is being closed down and the plant is for sale. The Australian scheme is to be closed down in 2013. This experience raises concerns about the possible impact of a new capacity mechanism in Great Britain.

Why Are Some Prices Stickier Than Others? Firm-Data Evidence on Price Adjustment Lags

Infrequent price changes at the …rm level are now well documented in the literature. However, a number of issues remain partly unaddressed. This paper contributes to the literature on price stickiness by investigating the lags of price

Searching for Additional Sources of Inflation Persistence: The Micro-Price Panel Data Approach

It is often argued that the baseline New-Keynesian model, which relies solely on the notion of infrequent price adjustment, cannot account for the observed degree of inflation sluggishness. Therefore it is a common practice among macro modellers to introduce an ad hoc additional source of persistence to their models. Yet, the empirical validity of this practice has never been formally tested. This paper attempts to examine whether there is some additional persistence present in the data on micro-prices, beyond that implied by infrequent price adjustment. We consider two distinct sets of assumptions consistent with the existence of an intrinsic or extrinsic source of sluggishness and build and estimate two alternative models based on these assumptions. It is shown that in he case of certain product categories, particularly food, there is evidence of less sluggishness than what the standard assumptions underlying the New-Keynesian model would imply. We find certain support for the existence of an additional source of sluggishness for some industrial goods and services. Importantly however, the results are sensitive to the choice of the model. We conclude that some inconsistencies with the baseline New-Keynesian assumptions may be tracked in the price behavior. Yet, it is too early to assess their strength or the effect on macro aggregates. Therefore, at the current stage it would be premature to discard the baseline version of the New-Keynesian model based on evidence from micro-data. Similarly, the micro support for introducing an extra source of inflation sluggishness to macro-models is still relatively weak.

State-Dependent Pricing Under Infrequent Information: A Unified Framework

We characterize optimal state-dependent pricing rules under various forms of infrequent information. In all models, infrequent price changes arise from the existence of a lump-sum menu We entertain various alternatives for the source and nature of infrequent information. In two benchmark cases with continuously available information, optimal pricing rules are purely state-dependent. In contrast, in all environments with infrequent information, optimal pricing rules are both time- and state-dependent, characterized by trigger strategies that depend on the time elapsed since the last date when information was fully factored into the pricing decision. After considering the case in which information arrives infrequently for exogenous reasons, we address pricing problems in which gathering and processing information also entails a lump-sum cost. When the information and adjustment costs must be incurred simultaneously, the optimal pricing policy is a fixed-price time-dependent rule. When the costs are dissociated, the optimal rule features price stickiness and inattentiveness. Finally, we consider versions of the price-setting problems in which firms continuously entertain partial information. We characterize the optimal pricing rules and provide numerical solution algorithms and examples in a unified framework.

The Law of One Price without the Border: The Role of Distance versus Sticky Prices

We build a single‐country, two‐city, model with nominal rigidities and transport costs which predicts that variation of LOP deviations is lower for goods with infrequent price adjustment after controlling for distance. We adapt the Engel and Rogers (1996) regression to analyse Japanese retail prices at the city level and find that results are consistent with the theoretical predictions. The regression results also suggest that the distance equivalent of nominal rigidities can be as large as the ‘width’ of the border found in the literature on international LOP, casting doubt on casual interpretations of distance as a metric for market segmentation.

State-Dependent Pricing under Infrequent Information: A Unified Framework

We characterize optimal state-dependent pricing rules under various forms of infrequent information. In all models, infrequent price changes arise from the existence of a lump-sum “menu cost.” We entertain various alternatives for the source and nature of infrequent information. In two benchmark cases with continuously available information, optimal pricing rules are purely state-dependent. In contrast, in all environments with infrequent information, optimal pricing rules are both time- and state-dependent, characterized by “trigger strategies” that depend on the time elapsed since the last date when information was fully factored into the pricing decision. After considering the case in which information arrives infrequently for exogenous reasons, we address pricing problems in which gathering and processing information also entails a lump-sum cost. When the information and adjustment costs must be incurred simultaneously, the optimal pricing policy is a fixed-price time-dependent rule. When the costs are dissociated, the optimal rule features price stickiness and inattentiveness. Finally, we consider versions of the price-setting problems in which firms continuously entertain partial information. We characterize the optimal pricing rules and provide numerical solution algorithms and examples in a unified framework. JEL classification codes: E00, E31

The frequency and costs of individual price adjustment

AbstractHow often do the nominal prices of individual goods change? What is the nature of costs of price adjustment? How big are these costs? Answering these questions may be important for constructing macroeconomic models that are useful for monetary policy analysis. The empirical literature reveals that many prices do change infrequently, in part because of physical costs of price adjustment. However, infrequent price adjustment also seems to be related to costs of decision making, to relationships between buyers and sellers, and to strategic behavior among sellers, all in ways that are not yet well understood. Copyright © 2007 John Wiley & Sons, Ltd.

Price stickiness in [formula omitted] models: New interpretations of old results

What is the relation between infrequent price adjustment and the dynamic response of the aggregate price level to monetary shocks? The answer to this question ranges from a one-to-one link [Calvo, G., 1983. Prices in a utility maximizing framework. Journal of Monetary Economics 12, 383–398] to no connection whatsoever [Caplin, A., Spulber, D., 1987. Menu costs and the neutrality of money. Quarterly Journal of Economics 102, 703–726]. The purpose of this paper is to provide a unified framework to understand the mechanisms behind this wide range of results. In doing so, we propose new interpretations of key results in this area, which in turn suggest the kind of Ss model that is likely to generate substantial price rigidity. Among these new interpretations, we revisit Caplin and Spulber's monetary neutrality result. We show that when price stickiness is measured in terms of the impulse response function, this result is not a consequence of aggregation, as is often assumed, but is due instead to the absence of price stickiness at the microeconomic level. We also show that the “selection effect,” according to which units that adjust their prices are those that benefit the most, is neither necessary nor sufficient to account for the higher aggregate flexibility of Ss-type models compared to Calvo models. Instead, the key concept is the contribution of the extensive margin of adjustment to the aggregate price response. The aggregate price level is more flexible than suggested by the microeconomic frequency of adjustment if and only if this term is positive.

Lumpy Price Adjustments: A Microeconometric Analysis

This paper presents a simple model of state-dependent pricing that allows identification of the relative importance of the degree of price rigidity that is inherent to the price setting mechanism (intrinsic) and that which is due to the price’s driving variables (extrinsic). Using two data sets consisting of a large fraction of the price quotes used to compute the Belgian and French CPI, we are able to assess the role of intrinsic and extrinsic price stickiness in explaining the occurrence and magnitude of price changes at the outlet level. We find that infrequent price changes are not necessarily associated with large adjustment costs. Indeed, extrinsic rigidity appears to be significant in many cases. We also find that asymmetry in the price adjustment could be due to trends in marginal costs and/or desired mark-ups rather than asymmetric cost of adjustment bands.

Lumpy Price Adjustments: A Microeconometric Analysis

This paper presents a simple model of state-dependent pricing that allows identification of the relative importance of the degree of price rigidity that is inherent to the price setting mechanism (intrinsic) and that which is due to the price's driving variables (extrinsic). Using two data sets consisting of a large fraction of the price quotes used to compute the Belgian and French CPI, we are able to assess the role of intrinsic and extrinsic price stickiness in explaining the occurrence and magnitude of price changes at the outlet level. We find that infrequent price changes are not necessarily associated with large adjustment costs. Indeed, extrinsic rigidity appears to be significant in many cases. We also find that asymmetry in the price adjustment could be due to trends in marginal costs and/or desired mark-ups rather than asymmetric cost of adjustment bands.

Price Stickiness in SS Models: New Interpretations of Old Results

What is the relation between infrequent price adjustment and the dynamic response of the aggregate price level to monetary shocks? The answer to this question ranges from a one-to-one link (Calvo, 1983) to no connection whatsoever (Caplin and Spulber, 1987). The purpose of this paper is to provide a unified framework to understand the mechanisms behind this wide range of results. In doing so, we propose new interpretations of key results in this area, which in turn suggest the kind of Ss model that is likely to generate substantial price rigidity. The first result we revisit is Caplin and Spulber's monetary neutrality model. We show that when price stickiness is measured in terms of the impulse response function, this result is not a consequence of aggregation, but is due instead to the absence of price-stickiness at the microeconomic level. We also show that the selection effect, according to which units that adjust their prices are those that benefit most, is neither necessary nor sufficient to account for the higher aggregate flexibility of Ss-type models compared to Calvo models. Instead, the key concept is the contribution of the extensive margin of adjustment to the aggregate price response. The aggregate price level is more flexible than suggested by the microeconomic frequency of adjustment if and only if this term is positive.

Dynamic pricing of inventory/capacity with infrequent price changes

We consider a problem of dynamically pricing a single product sold by a monopolist over a short time period. If demand characteristics change throughout the period, it becomes attractive for the company to adjust price continuously to respond to such changes (i.e., price-discriminate intertemporally). However, in practice there is typically a limit on the number of times the price can be adjusted due to the high costs associated with frequent price changes. If that is the case, instead of a continuous pricing rule the company might want to establish a piece-wise constant pricing policy in order to limit the number of price adjustments. Such a pricing policy, which involves optimal choice of prices and timing of price changes, is the focus of this paper. We analyze the pricing problem with a limited number of price changes in a dynamic, deterministic environment in which demand depends on the current price and time, and there is a capacity/inventory constraint that may be set optimally ahead of the selling season. The arrival rate can evolve in time arbitrarily, allowing us to model situations in which prices decrease, increase, or neither. We consider several plausible scenarios where pricing and/or timing of price changes are endogenized. Various notions of complementarity (single-crossing property, supermodularity and total positivity) are explored to derive structural results: conditions sufficient for the uniqueness of the solution and the monotonicity of prices throughout the sales period. Furthermore, we characterize the impact of the capacity constraint on the optimal prices and the timing of price changes and provide several other comparative statics results. Additional insights are obtained directly from the solutions of various special cases.