Price Stickiness and Customer Antagonism
45 Pages Posted: 29 Sep 2008
Date Written: September 2008
Explaining why prices do not immediately adjust to business cycles remains one of the most important unresolved questions in macroeconomics. When researchers ask managers for an explanation, their responses reveal a reluctance to vary prices for fear of "antagonizing customers." However, there is no empirical evidence that antagonizing customers through price variation reduces firm revenue or profit. We use a 28-month randomized field experiment involving over 50,000 customers to investigate this question. The experiment reveals how customers react if they buy a product and later observe the same retailer selling it for less. We find that customers react by making fewer subsequent purchases from the firm. The effect is largest among the firm's most valuable customers: those whose prior purchases were most recent and at the highest prices. Average revenue earned from these customers falls by over $90. The effect spills over to other products sold by the firm and represents an apparent "boycott"; many customers simply stop purchasing from the firm. The boycott persists throughout the 28-month measurement period and lowers overall firm profits by approximately $155,000. After ruling out alternative explanations we demonstrate the robustness of the findings by replicating the results with a separate firm in a different product category.
Keywords: Customer anger, Price stickiness, Monetary policy, Price adjustment
JEL Classification: E3, D12, E44
Suggested Citation: Suggested Citation