NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Rigidity of Prices

Dennis W. Carlton

NBER Working Paper No. 1813 (Also Reprint No. r0900)
Issued in 1986
NBER Program(s):   EFG

This paper presents evidence on the amount of price rigidity that exists in individual transaction prices. Using the Stigler-Kindahi data, I examine the behavior of individual buyers' prices for certain products used in manufacturing. My most important findings are: 1.The degree of price rigidity in many industries is significant. It is not unusual in some industries for prices to individual buyers to remain unchanged for several years. 2.Even for what appear to be homogeneous commodities, the correlation of price changes across buyers is very low. 3.There is no evidence that there is an asymmetry in price rigidity. In particular, prices are not rigid down-ward. 4.The fixed costs of changing price at least to some buyers seem trivial. There are plenty of instances where small price changes occur. 5.The level of industry concentration is strongly correlated with rigid prices. The more concentrated the industry, the longer is the average spell of price rigidity. 6.There appears to be a relationship between price rigidity, size of price change, and the length of time a buyer and seller deal with each other.I interpret the findings as evidence that it is erroneous to focus attention on price as the exclusive mechanism to allocate resources. Nonprice rationing is not a fiction, it is a reality of business and may be the efficient response to economic uncertainty.

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Document Object Identifier (DOI): 10.3386/w1813

Published: Carlton, Dennis W. "The Rigidity of Prices," American Economic Review,Vol . 76, No. 4, (September 1986), pp. 637-658.

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