Asking About Prices: A New Approach to Understanding Price Stickiness

by Alan S. Blinder, Elie Canetti, David Lebow

Why do consumer prices and wages adjust so slowly to changes in market conditions? The rigidity or stickiness of price setting in business is central to Keynesian economic theory and a key to understanding how monetary policy works, yet economists have made little headway in determining why it occurs. Asking About Prices offers a groundbreaking empirical approach to a puzzle for which theories abound but facts are scarce. Leading economist Alan Blinder, along with co-authors Elie Canetti, David Lebow, and Jeremy B. Rudd, interviewed a national, multi-industry sample of 200 CEOs, company heads, and other corporate price setters to test the validity of twelve prominent theories of price stickiness. Using everyday language and pertinent scenarios, the carefully designed survey asked decisionmakers how prominently these theoretical concerns entered into their own attitudes and thought processes. Do businesses tend to view the costs of changing prices as prohibitive? Do they worry that lower prices will be equated with poorer quality goods? Are firms more likely to try alternate strategies to changing prices, such as warehousing excess inventory or improving their quality of service? To what extent are prices held in place by contractual agreements, or by invisible handshakes? Asking About Prices offers a gold mine of previously unavailable information. It affirms the widespread presence of price stickiness in American industry, and offers the only available guide to such business details as what fraction of goods are sold by fixed price contract, how often transactions involve repeat customers, and how and when firms review their prices. Some results are surprising: contrary to popular wisdom, prices do not increase more easily than they decrease, and firms do not appear to practice anticipatory pricing, even when they can foresee cost increases. Asking About Prices also offers a chapter-by-chapter review of the survey findings for each of the twelve theories of price stickiness. The authors determine which theories are most popular with actual price setters, how practices vary within different business sectors, across firms of different sizes, and so on. They also direct economists' attention toward a rationale for price stickiness that does not stem from conventional theory, namely a strong reluctance by firms to antagonize or inconvenience their customers. By illuminating how company executives actually think about price setting, Asking About Prices provides an elegant model of a valuable new approach to conducting economic research.

Genres: Economics

394 pages, Hardcover

First published June 1, 1998

About the author

Alan Stuart Blinder is an American economist at Princeton University serving as the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs in the Economics Department, and vice chairman of The Observatory Group. He founded Princeton’s Griswold Center for Economic Policy Studies in 1990. Since 1978 he has been a Research Associate of the National Bureau of Economic Research. He is also a co-founder and a vice chairman of the Promontory Interfinancial Network, LLC. He is among the most influential economists in the world according to IDEAS/RePEc, and is "considered one of the great economic minds of his generation."

Blinder served on President Bill Clinton's Council of Economic Advisors (January 1993 - June 1994), and as the Vice Chairman of the Board of Governors of the Federal Reserve System from June 1994 to January 1996.

Reviews

[Cameron Wilson · Rating 4 out of 5]

Overall all a good book with convincing empirical evidence on how the entirety of private non-farm US GDP is priced. Worth a read. The best chapters are 1-5, 11, 12, 13, 17, 18.
The one weird thing is that Blinder et al never fully break out of their basic ontological framework where price movements would be inevitable if not for 'friction', and they'd move with walrasian efficiency. Areas where the survey results clash with parts of theory are constantly referred to as "unfortunate" or "bad news", and when a theory matches reality its considered "good news". Normal researchers should have a more platonic attitude. In contrast, economists seem to see their role as less observing and understanding the economy but instead creating armchair deductive theories and defending them at all costs.
All 12 interior chapters of the book would be unnecessary if the survey method was the norm in the first instance and economists induced conditional, historical theories based on survey. At the end of the book we understand that prices are sticky--but compared to what? Compared to a hypothetical made up standard. A more sane title for the book would be "Firm Price Setting in the Private Non-Farm US GDP". Check out Paul Downward and Fred Lee's 1998 review of the book "Asking About Prices: Post Keynesian Price Theory Reconfirmed".