Price Stickiness

Price Stickiness

Price stickiness (or sticky prices) describes the tendency of market prices to remain unchanged or to adjust only slowly in response to shifts in demand, costs, or broader economic conditions. When prices do not move to the level suggested by supply-and-demand forces, markets can experience inefficiency and short‑term disequilibrium.

Key points

• Prices may be slow to change even when input costs or demand shift.
• Stickiness can be one‑sided: prices may be easier to raise than lower (or vice versa).
• The concept also applies to wages (wage stickiness), which can affect employment.
• Sticky prices help explain why monetary changes can influence real output and employment.

How price stickiness works

Under standard supply-and-demand logic, prices adjust until quantity supplied equals quantity demanded. In practice, adjustment takes time. When prices don’t move to a new market‑clearing level, shortages or surpluses can occur and the economy can experience deadweight losses similar to those created by price controls.

In macroeconomics, price stickiness is central to New Keynesian explanations for why monetary policy and shifts in aggregate demand can change real output and employment in the short run rather than only affecting nominal variables.

Common causes of price stickiness

• Menu costs: the real costs of changing prices (reprinting catalogs, updating systems, communicating changes).
• Long-term contracts: fixed prices in supply agreements, leases, or service contracts prevent immediate adjustment.
• Imperfect information and decision inertia: firms or managers may not observe or respond quickly to changing conditions.
• Strategic behavior: firms may avoid raising prices to prevent losing market share, or avoid cutting prices to prevent a price war.
• Institutional factors: wage contracts, unions, and civil‑service pay scales can lock nominal wages in place.

Directional stickiness

• Sticky‑up: prices are reluctant to rise but fall more easily. If the market‑clearing price rises, observed prices lag below it, causing shortages.
• Sticky‑down: prices rise easily but resist falling. If the market‑clearing price falls, observed prices remain above it, producing surpluses.

Wage stickiness and labor markets

Wages are often downwardly sticky: employees resist nominal pay cuts, and employers may prefer layoffs over across‑the‑board cuts to preserve morale and productivity. This rigidity can prolong unemployment following negative demand shocks.

Price stickiness in oligopolies

In markets dominated by a few firms, price changes can be especially infrequent. Firms may avoid raising prices for fear of losing customers or avoid cutting prices to prevent retaliatory competition, reinforcing stickiness.

Why price stickiness matters

Sticky prices can:
* Create market inefficiencies and deadweight loss.
Keep prices permanently above or below the efficient level for a period, causing shortages or surpluses.
Transmit temporary cost shocks into persistent inflation if prices fail to fall after costs normalize.
* Cause monetary shocks to affect real activity (investment, employment, output) rather than only nominal variables.

Examples

• A once-popular smartphone keeps selling at $800 even after demand falls, because retailers or manufacturers are slow to mark it down.
• After supply disruptions push grocery prices up, those prices may remain elevated even when supply recovers if retailers are reluctant to cut prices.

Conclusion

Price stickiness—whether in goods, services, or wages—means markets do not always instantly reach a new equilibrium after shocks. Understanding its causes and consequences helps explain short‑run inefficiencies, persistent price or wage rigidity, and why policy or market interventions may be needed to restore balance.