Richmond Fed interview of Columbia University economist Emi
Nakamura:
https://www.richmondfed.org/-/media/richmondfedorg/publications/research/econ_focus/2015/q3/pdf/interview.pdf
On the topic of price-stickiness -
On the topic of price-stickiness -
“EF: Do you think
there really are such things as menu costs — meaning a direct cost to changing
prices — given innovations such as bar codes? Or are “pure” fixed costs of
price changes in models always really a stand-in for something else?
Nakamura: My sense
is that literal menu costs are not very important. If managers wanted to have
supermarkets where all the prices were digital, for example, it would be
possible. Coca-Cola at one point tried to have a vending machine that had
prices rise in hot weather and people got very irritated. So I think the right
theory has to somehow take this into consideration. It’s interesting to think
about why Uber has been able to have surge pricing and whether other sectors of
the economy might be able to do that too. But when we look at long-term data on
price rigidity, one of the things we just don’t see is prices getting more
flexible over time. It actually looks like prices are getting stickier, because
the inflation rate is falling. So I think the Calvo and menu cost models are
simple empirical models for complicated processes that we don’t fully
understand. The question is, why does price rigidity arise? In surveys of
managers that ask why they don’t change their prices, they almost always say
something about not wanting to upset their customers, this idea of implicit or
explicit contracts with them. I have another paper with Jón on customer markets
that tries to provide a model of this. Say you go to Starbucks every day, then
in a sense you become “addicted.” So Starbucks has an opportunity to price
gouge. But if you know that Starbucks is going to try to exploit you once you
become addicted, then you may try to avoid going there in the first place. So
it can be in the interest of both the firm and the customer for the firm to
“commit to a sticky price.” This theory can help explain some of the patterns
we see in the data — the fact that you see regular prices and downward
deviations (sales) but basically never upward deviations (reverse sales). A
similar theory applies to wages. You hire a cleaning person, and in principle,
you could set their wages as being indexed to the CPI. But it’s not a simple
thing for everybody in the world to pay attention to the CPI, so offering your
cleaning person a wage indexed to the CPI probably wouldn’t be practical. A
fixed wage salary is just a lot easier to understand. So maybe the right way of
thinking about price rigidity, at a deep level, is some combination of customer
markets and information frictions. But I think this is an area where
measurement is ahead of theory, and the ideal model has yet to be written”