What is Price Stickiness?

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Price stickiness is the resistance of a market price to change quickly, despite shifts in the broad economy suggesting a different price is optimal."Sticky" is a general economics term that can apply to any financial variable that is resistant to change. When applied to prices, it means that the sellers (or buyers) of certain goods are reluctant to change the price, despite changes in input cost or demand patterns.Price stickiness would occur, for instance, if the price of a once-in-demand smartphone remains high at say $800 even when demand drops significantly. Price stickiness can also be referred to as "nominal rigidity" and is related to wage stickiness.

Definition

Price stickiness refers to the phenomenon where market prices resist change despite shifts in the overall economic environment that suggest optimal prices should differ. It implies that sellers (or buyers) of certain goods are reluctant to change prices even when input costs or demand patterns have changed.

Origin

The concept of price stickiness originates from the economic theory of 'stickiness,' which dates back to the early 20th century. Economist John Maynard Keynes extensively discussed price and wage stickiness in his works, highlighting these stickiness factors as significant contributors to economic cycle fluctuations.

Categories and Features

Price stickiness can be categorized into two main types: upward stickiness and downward stickiness. Upward stickiness refers to the difficulty in raising prices, while downward stickiness refers to the difficulty in lowering prices. Price stickiness often occurs due to factors such as contractual obligations, menu costs (the cost of changing prices), and psychological factors like consumer resistance to price changes.

Case Studies

A typical case is Apple Inc., which often maintains the price of older iPhone models even when new models are released and demand for the older models may decline. This price stickiness helps Apple maintain its brand value and profit margins. Another example is the fast-food industry, where McDonald's keeps its menu prices stable during economic downturns to maintain customer loyalty and market share.

Common Issues

Investors analyzing price stickiness may encounter issues such as misunderstanding the relationship between price stickiness and market monopoly, and overlooking the long-term impact of price stickiness on a company's profitability. A common misconception is that price stickiness is always beneficial for businesses, whereas it can actually lead to inventory build-up and loss of market share.

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