Regular adjustment: theory and evidence

Fabio Rumler and Jerzy Konieczny

No 669, Working Paper Series from European Central Bank

Abstract: We ask why, in many circumstances and many environments, decision-makers choose to act on a time-regular basis (e.g. adjust every six weeks) or on a state-regular basis (e.g. set prices ending in a 9), even though such an approach appears suboptimal. The paper attributes regular behaviour to adjustment cost heterogeneity. We show that, given the cost heterogeneity, the likelihood of adopting regular policies depends on the shape of the benefit function: the flatter it is, the more likely, ceteris paribus, is regular adjustment. We provide sufficient conditions under which, when policymakers differ with respect to the shape of the benefit function (as in Konieczny and Skrzypacz, 2006), the frequency of adjustments across markets is negatively correlated with the incidence of regular adjustments. On the other hand, if policymakers differences are due to the level of adjustment costs (as in Dotsey, King and Wolman, 1999), then the correlation is positive. To test the model we apply it to optimal pricing policies. We use a large Austrian data set, which consists of the direct price information collected by the statistical office and covers 80% of the CPI over eight years. We run cross-sectional tests, regressing the proportion of attractive prices and, separately, the excess proportion of price changes at the beginning of a year and at the beginning of a quarter, on various conditional frequencies of adjustment, inflation and its variability, dummies for good types, and other relevant variables. We find that the lower is, in a given market, the conditional frequency of price changes, the higher is the incidence of time- and state-regular adjustment. JEL Classification: E31, L11, E52, D01

Keywords: attractive prices; menu costs; optimal pricing (search for similar items in EconPapers)
Date: 2006-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Regular Adjustment - Theory and Evidenc (2006)
Working Paper: Regular Adjustment: Theory and Evidence (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2006669

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