Why are Prices Sticky? The Dynamics of Wholesale Gasoline Prices

39 Pages Posted: 7 Jun 2003 Last revised: 13 Feb 2022

See all articles by Michael C. Davis

Michael C. Davis

Missouri University of Science and Technology - Department of Economics

James D. Hamilton

University of California at San Diego; National Bureau of Economic Research (NBER)

Date Written: June 2003

Abstract

The menu-cost interpretation of sticky prices implies that the probability of a price change should depend on the past history of prices and fundamentals only through the gap between the current price and the frictionless price. We find that this prediction is broadly consistent with the behavior of 9 Philadelphia gasoline wholesalers. We nevertheless reject the menu-cost model as a literal description of these firms' behavior, arguing instead that price stickiness arises from strategic considerations of how customers and competitors will react to price changes.

Suggested Citation

Davis, Michael C. and Hamilton, James D., Why are Prices Sticky? The Dynamics of Wholesale Gasoline Prices (June 2003). NBER Working Paper No. w9741, Available at SSRN: https://ssrn.com/abstract=414720

Michael C. Davis

Missouri University of Science and Technology - Department of Economics ( email )

1870 Miner Circle
101 Harris Hall
Rolla, MO 65409-1250
United States

James D. Hamilton (Contact Author)

University of California at San Diego ( email )

9500 Gilman Drive
Mail code: 0508
La Jolla, CA 92093-0508
United States
619-534-5986 (Phone)
619-534-7040 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States