Asymmetric price adjustment over the business cycle

Daniel Levy (), Haipeng Allan Chen (), Sourav Ray (), Elliot Charette (), Xiao Ling (), Weihong Zhao (), Mark Bergen () and Avichai Snir ()
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Daniel Levy: RCEA - Rimini Center for Economic Analysis, Emory University [Atlanta, GA], Bar-Ilan University [Israël], ISET - International School of Economics at TSU, ICEA - International Centre for Economic Analysis
Haipeng Allan Chen: University of Iowa [Iowa City]
Sourav Ray: University of Guelph [Guelf, Ontario, Canada]
Elliot Charette: UMN - University of Minnesota System
Xiao Ling: Central Connecticut State University
Weihong Zhao: UMD - University of Maryland [College Park] - University System of Maryland
Mark Bergen: UMN - University of Minnesota System
Avichai Snir: Bar-Ilan University [Israël]

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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 and Aggregate Fluctuation; Unemployment Models; Recessions; Expansions (search for similar items in EconPapers)
Date: 2025-06-11
Note: View the original document on HAL open archive server: https://hal.science/hal-05109808v1
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Published in Economics Letters, In press, (Forthcoming)

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