Kiel Working Papers, Kiel Institute for World Economics
No 1352:
Regular Adjustment. Theory and Evidence
Jerzy Konieczny and Fabio Rumler
Abstract: We ask why, in many circumstances and many environments,
decision-makers choose to act on a time-regular basis (e.g. adjust every
six weeks) or on a stateregular basis (e.g. set prices ending in a 9), even
though such an approach appears suboptimal. The paper attributes regular
behaviour to adjustment cost heterogeneity. We show that, given the cost
heterogeneity, the likelihood of adopting regular policies depends on the
shape of the benefit function: the flatter it is, the more likely, ceteris
paribus, is regular adjustment. We provide sufficient conditions under
which, when policymakers differ with respect to the shape of the benefit
function (as in Konieczny and Skrzypacz, 2006), the frequency of
adjustments across markets is negatively correlated with the incidence of
regular adjustments. On the other hand, if policymakers differences are due
to the level of adjustment costs (as in Dotsey, King and Wolman, 1999),
then the correlation is positive. To test the model we apply it to optimal
pricing policies. We use a large Austrian data set, which consists of the
direct price information collected by the statistical office and covers 80%
of the CPI over eight years. We run cross-sectional tests, regressing the
proportion of attractive prices and, separately, the excess proportion of
price changes at the beginning of a year and at the beginning of a quarter,
on various conditional frequencies of adjustment, inflation and its
variability, dummies for good types, and other relevant variables. We find
that the lower is, in a given market, the conditional frequency of price
changes, the higher is the incidence of time- and state-regular
adjustment.
Keywords: Optimal pricing, attractive prices, menu costs; (follow links to similar papers)
JEL-Codes: E31,; L11,; E52,; D01; (follow links to similar papers)
39 pages, June 2007
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