Asymmetric price adjustment over the business cy

Daniel Levy, Haipeng (Allan) Chen (), Sourav Ray, Elliot Charette, Xiao Ling, Weihong Zhao, Mark Bergen and Avichai Snir ()
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Haipeng (Allan) Chen: Tippie College of Business University of Iowa
Sourav Ray: University of Guelph
Elliot Charette: University of Minnesota and Federal Reserve Bank of Minneapolis
Xiao Ling: Central Connecticut State University
Weihong Zhao: University of Maryland
Mark Bergen: University of Minnesota
Avichai Snir: Department of Economics Bar-Ilan University

No 2025-03, Working Papers from Bar-Ilan University, Department of Economics

Abstract: Studies of micro-level price datasets find more frequent small price increases than decreases, which can be explained by consumer inattention because time-constrained shoppers might ignore small price changes. Recent empirical studies of the link between shopping behavior and price attention over the business cycle find that consumers are more (less) attentive to prices during economic downturns (booms). These two sets of findings have a testable implication: the asymmetry in small price changes should vary over the business cycle—it should diminish during recessions and strengthen during expansions. We test this prediction using a large US store-level dataset with more than 98 million weekly price observations for the years 1989–1997, which includes an 8-month recession period, as defined by the NBER. We compare price adjustments between periods of recession (high unemployment) and expansion (low unemployment). Focusing on small price changes, we find, consistent with our hypothesis, that there is a greater asymmetry in small price changes during periods of low unemployment compared to the periods of high unemployment, implying that firms’ price-setting behavior varies over the business cycle.

Keywords: Asymmetric Price Adjustment; Small Price Changes; Consumer Inattention; Price Rigidity; Sticky Prices; Business Cycles; Unemployment; Recessions; Expansion (search for similar items in EconPapers)
JEL-codes: D11 D21 D80 D91 E31 E32 L11 L16 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2025-01
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