The Effects of Focal Points and the Strategic Environment on Nominal Price Inertia
73 Pages Posted: 18 Feb 2015 Last revised: 15 May 2018
Date Written: February 9, 2015
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: Suggested Citation