Asymmetric price adjustment over the business cycle

TL;DR

This paper investigates how the asymmetry in small price changes varies over the business cycle, finding that firms' pricing behavior is more asymmetric during economic expansions than recessions, based on extensive US store data.

Contribution

It provides empirical evidence that price adjustment asymmetry fluctuates with the business cycle, highlighting the dynamic nature of firm pricing strategies.

Findings

Greater asymmetry in small price changes during economic expansions.

Price adjustment behavior varies with unemployment levels.

Empirical validation using 98 million weekly observations.

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 attentive to prices during economic downturns, and less attentive during economic 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.