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Your many US readers might need to know that Kraft Dinner = Kraft Macaroni & Cheese.

Hmm - I am somewhat freshly retired, and you are right, I do not know the price of THOSE items on a day-to-day basis. But on a week-to-week basis, which is the rhythm of grocery store flyers, I certainly know the advertised prices of the items I normally eat, and also the ones I might make marginal decisions to choose. And when I go shopping, typically at 'budget' places, I am extremely aware that I am perhaps even less discriminating than my fellow shoppers. (I am a retired professional with the results of a DC retirement plan, and no complaints about that.)
Maybe I am at a margin, but margins are where decisions are made that matter, and I assure you there are a lot of people carefully selecting where and what they buy in this exact domain of groceries.
Where do you shop? Loblaws, maybe? That already says you are not price-sensitive. Check out their Food Basics other brand some time and look around. You will be amazed by the prices (if you ever noticed the prices at Loblaws) and by the care of the other shoppers.

While I can't tell you the price for anything on your list (I have never bought one of those things), I certainly know the price of commonly purchased grocery items. Apples are ~1.50/lb in the summer, $2/lb in the winter. A good price for Tomatoes is $1/lb...more and don't bother. Peppers are $2/lb at the Italian market, or $5-6/lb at a typical chain grocery store. One store charges $2.50/loaf for fresh bread, while most others charge around $4.

The assumption that people don't know grocery prices is generally false for anyone who lives on a budget, and it doesn't take much rise on a few items to squeeze said budget. Gas prices...I could guess at gas prices and probably be close, but only because they've been fairly flat for months. When they're less stable, I'd be hard pressed to tell you without going to the office window and checking.

This effect probably has to do with how often you buy a single item. Many people buy gas 1-2 times per week, I might buy gas every month and a half. Likewise, I buy apples about once a week, while someone who buys a 5-lb bag might only do so once a month.

Replace the big sign with the weekly flyer the grocery store puts out, and information on common items is readily available.

I'm not sure how my observation relates to sticky prices, just that you're idea that people don't notice price rises does not jive with my experience.

Maybe consumers prefer sticky prices precisely where they are most ignorant of price fluctuations. Consumers like to feel that they are getting a "fair" price, that they are not getting ripped off. In the case of gasoline, they can see prices prominently posted everywhere everyday, so they feel that they are knowledgeable about the prevailing market price. The fact that the price changes every day is not a concern because they feel that they are in control by knowing the price all the time. Now when they go buy a grocery item and they have no idea what the price has been in the recent past, how can they feel comfortable paying the posted price, how can they know that the posted price isn't one that only suckers pay? By having some assurance that the posted price has likely not changed for a while, so that many other people have been paying the price.

Alan:

"That already says you are not price-sensitive."

There's a big difference here, though - price-sensitivity and preferences for sticky prices are two completely different animals!

In fact, price sensitive people should *prefer* non-sticky prices, if the fluctuations are asymmetric between stores and they have the choice of shopping between stores. That way, you can compare prices in the flier and go to the store that is offering the best prices that week for the goods you like (regardless of what the prices for those goods were last week).

Remember - price stickyness works in *both* directions.


For what it's worth, I took a look at the Sobey's flyer RE: apples and tomatoes.

" Apples are ~1.50/lb in the summer, $2/lb in the winter."

$1.29. A difference of 14%

"A good price for Tomatoes is $1/lb"

This one, however, you nailed. :)

"I'm not sure how my observation relates to sticky prices, just that you're idea that people don't notice price rises does not jive with my experience."

I think people do notice overall rises in prices - absolutely. But specific grocery items? I doubt most people notice it the way they do a change in the price of gas and that price changes every day.

Groc

Keep in mind there's a difference between a preference for 'low prices' and a preference for 'sticky prices'.

A preference for sticky prices would suggest, that customers value consistency in pricing and would be willing to pay a premium for it. That is, given the choice between a week-by-week pricing schedule that looked like this:

$10, $12, $9, $13, $10, $11, $12 - Average of $11

$11.50, $11.50, $11.50, $11.50, $11.50, $11.50, $11.50 - Average of $11.50

That customers would prefer the second one. I have trouble buying it, for the reasons discussed in the post.

14%...clearly I'm not as good at this as I thought.

I did have a thought on price stickiness. Wouldn't prices appear to be sticky in both directions given the competing interests of consumers and retailers. Consumers don't like to see prices rise, and given that prices rise more often than not, prefer to frequent retailer that hold them flat as long as they can. However, when prices decline, the retailer takes advantage of this to earn additional profit until the competition forces him down. In this case, the less information the consumer has on the competition's pricing, the stickier it'll be on the downside, while the stickiness to the upside leads to the consumer not actively seeking more information.

Clearly I'm not an economist, but it just seems to me that price stickiness is inherently preferable because it makes life easier for both consumers and merchants. You'll note that non-sticky items (gas prices, airline tickets, etc.) are the prices that people complain about the most, despite being a fairly small part of the average person's budget.

Yes good point - I agree I have marginal interest in food price stickiness. I expect apples to have one price in winter, another in summer, and maybe next year it is a whole different game. But I also have no willingness to let the price rise freely.
That is entirely different from working VERY hard to make the prices sticky downwards, which I like.
So maybe I am totally off the point.
I do not think so. The original post suggested people do not pay attention to grocery prices.
My response is that you guys who are empolyed do not much - I agree.
We who are not - not so much.

Apples are the only item on that list I buy. 99c/lb ($2.18/kg) is a very good price for apples. I can't think what I last paid for them. Yes, I am better informed about gas prices than about most items I buy in the supermarket. And gas prices seem to be less sticky.

Even though I can think of a few counterexamples, of things I care about but don't know about, those counterexamples seem to be exceptions that prove the rule. It's things I care about but *can't* know about. Not things, like grocery prices, where I did have the information, but have forgotten it.

I think Mike's got a point here.

But I would change it slightly. If I strongly prefer the temperature in my house staying constant, that presumably means I would notice if it changes (unless it's for some instrumental reason like storing my wine at the right temperature). If I didn't notice when it changes, that probably means I don't really care if it changes.

"Did the price of apples change since the last time you bought them? You don't remember? And you say you prefer sticky apple prices? Did the price of gas change since you last filled up? You do remember? And yet you say you don't care if gas prices change? That's not plausible."

Yep. Good point.

1. I don't accept your premise. The $250 or so I spend each week at the grocery store means nothing to me, and yet I have no trouble remembering the prices of all the items I buy from week to week. And a 10% hike in that bottle if mineral water produces an adverse psychological effect even though A) it's only 20c, and B) it's on a luxury item I don't need anyway. I don't pay much attention to such prices, so in my opinion most consumers are likely to be more, not less informed than me.

2. It strikes me as bizarre that you have chosen gas prices in an attempt to cast doubt on consumer preferences for sticky prices; a more counterproductive example could hardly be imagined.

People hate gas prices because they change a lot, not because they are high - a liter of gas is still a lot cheaper than a liter of water at a gas station. But frequent price changes produce the possibility of "winners" and "losers" when choosing a time and location of purchase. People from the suburbs who drive down to my Friday night bridge game like to fill up with cheap gas afterward before we meet for the postmortems. The same people who will happily spend $4 on a coffee express unbelievable degrees of regret if they then find that they could have bought somewhere else half a cent cheaper - I have literally heard a woman exclaim with dismay over a 0.2 cent difference; 20c even with a 100 liter tank.

None of them ever complain about the price of milk, which, being managed by a cartel in Ontario, rises at double the rate of inflation each year but does so smoothly.

There is therefore a strong incentive for retailers not to change prices too quickly. But retailers who either buy on a spot market, or else can be arbitraged by those who can sell on one have little choice.

Now I feel embarrassed though I love the discussion. Let me retract the initial blame of Nick Rowe. Now I Will blame Mike Moffatt.
In any case I do not believe people at the margin are confused about prices. Economics profs likely are.

I am not so sure consumers prefer sticky prices as much as are more easily fooled by them. When costs go up, sizes are reduced to keep the same box price. When one manufacturer has to compete with a lower priced manufacturer, it is often preferable to sell a smaller package at the same price as them than list a higher price.

Cause and effect? If prices tend to be sticky, its not necessary to know them. Its only necessary to know that they are generally fair. On the other-hand if a price isn't sticky, you need to keep track of it, otherwise you could be disadvantaged.

Still, I suspect people know gas prices because gas stations sell one product and put the price out on a big sign. If the grocery store sold generic food substitute and put the price out on a big sign, I bet you know it off-hand too.

" Now I Will blame Mike Moffatt. In any case I do not believe people at the margin are confused about prices. Economics profs likely are."

For what it's worth, my training is in Economics, but I'm a *Business* lecturer, my research is in pricing for the car rental industry (who I've also done pricing consulting work for), and my day job is running a small company.

Perhaps the presence of substitutes should be considered in your explanation. Gasoline does not have substitutes that people find palatable; foods on the other hand do. Perhaps that plays on consumer preferences and on price setting by manufacturers/wholesalers.

I honestly do not understand the point of this post.

Is it to refute the dubious idea that there is some, undefined way in which consumers "want" prices to be (again, in some undefined way) "sticky"?

When the price of gasoline rises rapidly, people complain a lot and pressure their politicians to "investigate" and so on. Does that constitute evidence that people "want" their prices to be "sticky"?

Supermarkets and food processors/wholesale marketers administer the prices you see in supermarkets. Does that make them "sticky" in a macro sense? I don't know, because I don't know what "sticky" means, except in a macro sense.

Have to agree with Mike E - substitution effects must be considered. Regardless of whether consumers want sticky prices, they are knowledgeable about pricing where there is a consistent and reliable flow of information AND it is a product that they must purchase, if you drive an automobile.

If you surveyed committed bicyclists on gasoline price, they would not know the price even if they pass 15 stations every day on their ride into work.

Regarding grocery prices, consumers are aware of their overall food budget, and they know when a general price rise in a base commodity (eggs, milk, bread, meat) takes place, then their market basket shifts based on their budget and ability to find substitutes (quality and quantity). The consumer expectation would be that such general price changes were consistent across all competitive stores, which they would most likely validate.

Stickiness in the grocery store is the ability of the grocer to maintain an overall price/value proposition, whether that be a no-hassle everyday low price or a club discount and promotion-driven price philosophy. As long as the consumer understands that the grocery store will stay true to their price philosophy, then "stickiness" (perception of price reliability) can be maintained.

There are many simple psychological explanations about why prices are always expressed with the least significant digit as a 9. And gasoline prices are expressed in 9/10 of a cent, which I guess can be thought of as a historical anachronism. If you know your tank holds 20 gallons, that extra 0.001% of a dollar x 20 is a real deal breaker.

Similarly with grocery, the price war starts at X.99 and goes from there. Note that now with caloric information starting to be required on menus, restaurants are re-engineering items to have, say, 499 calories rather than 500. This behavior on the part of consumers to over weigh insignificant variances is interesting when considering the price stickiness problem and what is deemed to be rational behavior.

As a slight cultural anecdote, I understand that the LA-based 99-Cent Stores expresses all executives salaries using a similar rule - a 150K executive will have an annual salary of $149,999.99.

There are two big things missing from this analysis: the importance of price discrimination, and the context in which competition and institutional arrangements affect approaches to price discrimination/profit maximization.

Using 'flyer' prices to determine whether/if prices are sticky and consumers are even aware of the prices is going to be massively incorrect. Stores advertise prices in flyers for things which will bring consumers in the door (and usually not sticky); the hope is that once the consumers are inside, they will spend money on things for which prices are not well known (or sticky). This is a basic strategy of price discrimination: consumers who are price sensitive will not buy the other goods (with higher mark-ups), those who are not will spend a lot. Sometimes the goods advertised might even be sold at a loss, if (on average) stores make money.

So to get back to the examples above: 'average' consumers might know the price of tomatoes (apples, etc). They will not know the price of Scheider's Hoof&Rind Weiners (although some small subset of consumers might). Stores will devote considerable efforts and budgets to price the weiners JUST low enough that the smallest group of potential purchasers do not notice the price (it seems 'fair' to them), but as high as possible otherwise. (Actually not the smallest group, but to maximise the total profits). In practice, this research is probably not done by the shop, but by Megafoods, Inc., with suggested pricing points, occasional sale/advertising promotions, very specific calculations about what weiners need to be at eye level and prominent (with kickbacks to the store, etc).

And Megafoods Inc actually subsects the Hoof&Rind Weiner market as much as possible, so that Premium Hoof&Rind is available (so that Premium customers tell the company they want to spend more, and also so that Economy customers know they're getting a good deal compared to the Premium). And they sell different mixes and different serving sizes to different shops so as to segment the market further (Organo Hoof&Rind, BigBox Hoof&Rind, Corner Hoof&Rind, Open24 Hours for just when you need Hoof&Rind plus Cheese-Like Substance fix after a major bender, etc). The Zero Frills type shops (somewhat inconvenient, not so pretty, etc) fulfill several functions: they do have lower expenditures, but they also make explicit the convenience cost.

Scheiders and many other companies exist more to get the extra pricing power of the brand than they do for any techno-industrial-organisational advantage - in other words, the pricing power of a brand is frequently more valuable than the cost advantages of more efficient production. bLoblaws has its loyalty programs to reinforce its brand and pricing power.

Scheider's and bLoblaws are also (at the same time) in a repeated cooperation/competition game - fighting with each other (and all the other participants) to see which party keeps the biggest share of the pie, but also trying to ensure that in the long term, the pie doesn't spoil. They have a variety of arrangements, including contractual, habitual/customary, 'market practice' understandings, rewards/benefits/punishment arrangements - few of which can be simply abrogated or ignored without some renegotiation, compensation, or other shifts.

Every one of these shops, chains, producers, etc., is also reacting to the moves of others, and (it turns out) for large classes of goods the biggest effects are not from pricing, but other competitive moves (location, market segmentation, etc). Locations, for example, do not change as much - the shop with a great location doesn't need to change its pricing as often.

This is, of course, all taught in basic micro, forgotten, and then relearned by business school students. I haven't seen much work by macroeconomists indicating that they've tried to figure out the implications of this for prices and the speed of price adjustments/monetary transmission.

The bottom line in terms of the micro/macro split is that for a huge section of the marketplace for many goods and services, consumers are just not that price sensitive at the transaction level, and firms have found it is more profitable to segment the market into Prices People Notice (apples, commodities, etc) and Stuff People Just Buy. The calculation of maximising revenues/profits through price discrimination has theory and data behind it, but neither are complete. Once a rough approach that works in practice is in place, companies will be quite reluctant to change their price discrimination approach/positioning on the market.

So the 'menu price' is not just a simple first-order recalculation problem - the impact of any change affects price discrimination in an uncertain way, they don't have real-time information on those changes, and the institutional arrangements are not perfectly flexible.

The sticky pricing is not just an accidental artefact of how markets work, it's an integral part for lots of goods. The calculation/recalculation/reaction functions are not perfect (if even known).

These could all be studied, and may be important, but it seems some economists are debating whether or not prices are actually sticky (when the evidence seems clear), and trying to determine whether what works in practice can actually work in theory.

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