Informational Rigidities and the Stickiness of Temporary Sales

Abstract: We use unique price data to study how retailers react to underlying cost changes. Temporary sales account for 95% of price changes in our data. Simple models would, therefore, suggest that temporary sales play a central role in price responses to cost shocks. We find, however, that, in response to a wholesale cost increase, the entire increase in retail prices comes through regular price increases. Sales actually respond temporarily in the opposite direction from regular prices, as though to conceal the price hike. Additional evidence from responses to commodity cost and local unemployment shocks, as well as broader evidence from BLS data reinforces these findings. We present institutional evidence that sales are complex contingent contracts, determined substantially in advance. We show theoretically that these institutional practices leave little money ?on the table?: in a price-discrimination model of sales, dynamically adjusting the size of sales yields only a tiny increase in profits.

Keywords: Trade deals; Retail sales; Regular retail prices;

JEL Classification: M30; E30; L11;

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Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Staff Report

Publication Date: 2015-06-25

Number: 513

Pages: 49 pages