The Effects of Focal Points and the Strategic Environment on Nominal Price Inertia

73 Pages Posted: 18 Feb 2015 Last revised: 15 May 2018

See all articles by Abel Winn

Abel Winn

Chapman University - The George L. Argyros School of Business & Economics

Date Written: February 9, 2015

Abstract

Prior laboratory experiments have suggested that prices and expectations are flexible when firms’ prices are strategic substitutes but sticky when they are strategic complements. I argue that the observed asymmetry is influenced by focal points in the participants’ payoff tables across treatments. I manipulate the focal points in a set of laboratory experiments and find that the asymmetry in initial price adjustment is reduced by 59%. The residual asymmetry appears to be due to the fact that strategic substitutability reduces the number of strategies that participants saw as viable.

Keywords: Money illusion, anchoring, focal points, nominal rigidity, sticky prices

JEL Classification: C72, C92, E31

Suggested Citation

Winn, Abel, The Effects of Focal Points and the Strategic Environment on Nominal Price Inertia (February 9, 2015). Available at SSRN: https://ssrn.com/abstract=2566431 or http://dx.doi.org/10.2139/ssrn.2566431

Abel Winn (Contact Author)

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States

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