Sticky prices refer to prices that are slow to adjust downwards even when economic conditions warrant a reduction, such as during periods of decreased demand. The key aspects of sticky prices include:
- Firms are reluctant to cut prices frequently due to the cognitive, menu, and negotiating costs associated with price changes.
- Lowering prices can signal weakness or damage brand perception of value in the eyes of customers.
- During recessions, sticky prices prevent inflation from falling as quickly as it might otherwise.
- Empirical evidence shows retail prices adjust gradually rather than immediately mirroring costs or demand.
- Downward price rigidity is greater than flexibility to raise prices, even as input costs fluctuate.
- Factors like multi-part pricing, contracts, and implicit coordination help sustain price points.
The degree of stickiness varies by industry and product type. It reflects both competitive pressures and businesses’ preference to adjust prices incrementally over adjusting them significantly in the short term.