Price stickiness refers to the reluctance of firms to adjust their prices downward in response to falling costs or demand. Prices tend to remain sticky or rigid on the downside.
- Prices change less frequently than costs or market conditions may suggest
- Downward adjustments are implemented more gradually than upward movements
- Factors like menu costs, contracts, customer perceptions slow reactions
This asymmetric price flexibility is more pronounced during periods of economic weakness or recession.
Implications include dampened monetary policy transmission and a sticky inflation level that can prolong recessions.
Causes relate to firms’ focus on maintaining profit margins and reluctance to lose customers through sudden price drops that may draw suspicion.
Overall, a degree of stickiness enables stable producer-consumer relationships but can distort macroeconomic adjustments if persisting for prolonged periods. Recognizing this behavior aids demand forecasting.