Shrinking Goods and Sticky Prices: Theory and Evidence

Avichai Snir and Daniel Levy ()

MPRA Paper from University Library of Munich, Germany

Abstract: If producers have more information than consumers about goods’ attributes, then they may use non-price (rather than price) adjustment mechanisms and, consequently, the market may reach a new equilibrium even if prices remain sticky. We study a situation where producers adjust the quantity (per package) rather than the price in response to changes in market conditions. Although consumers should be indifferent between equivalent changes in goods' prices and quantities, empirical evidence suggests that consumers often respond differently to price changes and equivalent quantity changes. We offer a possible explanation for this puzzle by constructing and empirically testing a model in which consumers incur cognitive costs when processing goods’ price and quantity information. The model is based on evidence from cognitive psychology and explains consumers’ decision whether or not to process goods’ price and quantity information. Our findings explain why producers sometimes adjust goods’ prices and sometimes goods’ quantities. In addition, they predict variability in price adjustment costs over time and across economic conditions.

Keywords: Sticky Prices; Rigid Prices; Cognitive Costs of Attention; Information Processing Cost; Rational Inattention; Price Adjustment; Quantity Adjustment; Downsizing (search for similar items in EconPapers)
JEL-codes: D03 D11 D21 D40 E31 L00 L11 L15 L16 M21 M31 (search for similar items in EconPapers)
Date: 2011-03-13
New Economics Papers: this item is included in nep-com and nep-hme
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Related works:
Working Paper: Shrinking Goods and Sticky Prices: Theory and Evidence (2011)
Working Paper: Shrinking Goods and Sticky Prices: Theory and Evidence (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:29565

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