Sticky prices in a dynamic oligopoly: An investigation of (s,S) thresholds

Abstract

The strategic implications of costly price adjustment are investigated empirically. I assume that managers are engaged in a state-space game and ask if the dynamic considerations that arise when they condition their choices on the state cause prices to be more or less rigid than when players use more myopic pricing rules. The answer to this question depends on a parametric specification of the problem that lends itself to empirical assessment. The micro-panel data used to investigate this issue consist of weekly prices, sales, costs and promotional activity for three brands of saltine crackers sold by four chains of grocery stores in a small US town. I find that, in this market, strategic behavior exacerbates price rigidity. The thresholds are wider and the time between changes is longer than would be observed in a more myopic setting.