Coarse Pricing Policies

Kilts Center for Marketing at Chicago Booth – Nielsen Dataset Paper Series 1-027

46 Pages Posted: 3 Jan 2015 Last revised: 14 Feb 2019

Date Written: January 31, 2019

Abstract

The puzzling behavior of inflation in the Great Recession and its aftermath has refocused attention on the constraints that firms face when setting prices. Using new empirical and theoretical results, I argue that each firm’s choice of how much information to acquire to set prices plays a key role in determining patterns of pricing at the product-level and the resulting degree of aggregate price rigidity in response to shocks. In support of the information channel, I present product-level evidence that firms price goods using coarse pricing policies that are updated infrequently and consist of a small menu of prices. Firms are heterogeneous in the complexity and duration of their pricing policies, and this heterogeneity is reflected in differential responses to the Great Recession cycle, with firms exhibiting more complex policies adjusting prices more aggressively. I develop a theory of information-constrained price setting that generates coarse pricing endogenously, and quantitatively matches the discreteness, duration, and volatility of policies in the data. The model generates the heterogeneous patterns of adjustment seen in the data, with prices adjusting noisily and sluggishly. Low aggregate demand coupled with high fundamental volatility induces firms to keep their prices relatively high, to protect themselves from losses in an uncertain environment

Keywords: Inflation puzzle, Great Recession, Discrete Prices, Rational Inattention, Nominal Rigidities

JEL Classification: E3, E5

Suggested Citation

Stevens, Luminita, Coarse Pricing Policies (January 31, 2019). Kilts Center for Marketing at Chicago Booth – Nielsen Dataset Paper Series 1-027. Available at SSRN: https://ssrn.com/abstract=2544681 or http://dx.doi.org/10.2139/ssrn.2544681

Luminita Stevens (Contact Author)

University of Maryland ( email )

Department of Economics
4121C Tydings Hall
College Park, MD 20742
United States

HOME PAGE: http://econweb.umd.edu/~stevens/

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