Convenient Prices, Currency, and Nominal Rigidity: Theory with Evidence from Newspaper Prices

FRB of Kansas City Research Working Paper No. 05-11

53 Pages Posted: 20 Jan 2006

See all articles by Edward S. Knotek

Edward S. Knotek

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Date Written: December 2005

Abstract

Newspapers, movie tickets, and concession stand items typically charge prices that facilitate rapid, simple transactions: their prices often coincide with available monetary units, require few pieces of money, or require little change. In this sense, these prices are more convenient than other proximate prices. I model a firm that explicitly incorporates convenience into its pricing decisions, where convenience is quantified by the number of currency units in a transaction. The model illustrates how alternating periods of price rigidity and flexibility can arise in such a setting, along with rapid switching between convenient prices. I compile time series data on newspaper cover prices and use simulations to show that convenience is an essential component of these prices. In the empirical data, firms set prices that were more convenient than adjacent prices 61% of the time. Standard menu costs cannot replicate this behavior. Because convenience appears to affect many of the consumer goods and services with the stickiest prices in the U.S. economy, studies focusing on very sticky prices must be cognizant of convenience's role in effecting above-average price rigidity.

Keywords: Convenient Prices, Relative Inconvenience, Price Rigidity, Menu Costs, Indirect Inference, Newspaper Pricing History

JEL Classification: E31, D40, C15, N81, N82

Suggested Citation

Knotek, Edward S., Convenient Prices, Currency, and Nominal Rigidity: Theory with Evidence from Newspaper Prices (December 2005). FRB of Kansas City Research Working Paper No. 05-11, Available at SSRN: https://ssrn.com/abstract=877181 or http://dx.doi.org/10.2139/ssrn.877181

Edward S. Knotek (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

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