Heterogeneity in Price Rigidity: Evidence from Primary Micro-Level Data*

We combine two unique data sets to document and explain a time varying price rigidity. The first data set consists of the time series of actual retail and wholesale transaction prices, and a measure of upstream commodity cost for 12 products in refrigerated and frozen orange juice categories collected weekly over a three-year period, 1989–1992, at a large midwestern supermarket chain. A special feature of these data is that they contain two episodes of major unanticipated exogenous commodity cost shocks. The examination of the cost-price relationship suggests that the manufacturers’ and the retailer’s reactions to these two costs shocks were very different. Specifically, we find that prices exhibit significantly more rigidity in response to the second cost shock than to the first. The second data set was collected in order to determine the possible reasons for this variation in price rigidity. Specifically, we undertook an exhaustive search of all publicly available sources of information to learn more about the events surrounding the two cost shocks. Based on content analysis of all the information collected we conclude that there were three fundamental differences between the two cost shocks. First, the first cost shock was almost twice as large as the second. Second, the first cost shock had a more permanent nature while the second had a more temporary nature. Third, we find that the market participants had a lot more information on the first cost shock than on the second. We conclude that price adjustment is more flexible in response to cost shocks that are larger in size, that are more permanent, and on which the market participants have more information. Thus, we provide micro level evidence that the size of a cost shock, the degree of their persistence, and the associated informational imperfection, may be important determinants of the degree of individual price rigidity.