Why are Prices Sticky? The Dynamics of Wholesale Gasoline Prices
Michael C. Davis
Missouri University of Science and Technology - Department of Economics
James D. Hamilton
University of California at San Diego; National Bureau of Economic Research (NBER)
NBER Working Paper No. w9741
The menu-cost interpretation of sticky prices implies that the probability of a price change should depend on the past history of prices and fundamentals only through the gap between the current price and the frictionless price. We find that this prediction is broadly consistent with the behavior of 9 Philadelphia gasoline wholesalers. We nevertheless reject the menu-cost model as a literal description of these firms' behavior, arguing instead that price stickiness arises from strategic considerations of how customers and competitors will react to price changes.
Number of Pages in PDF File: 39working papers series
Date posted: June 7, 2003
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