Price Inflexibility vs Recovery

Krugman cites a new paper by Antonio Fatas and Ilan Mihov that presents the case for expanding our concepts of the Business Cycle beyond simply “recession” and “healthy” – now to include a distinct “recovery” stage – because recoveries are becoming more and more significant. Recoveries represent a significant additional “cost” (measured against potential GDP), and look more and more distinct.

This makes me wonder why recoveries are taking longer than they used to… I’ve been wondering lately how much our economy has shifted from customized pricing to standard pricing over the past 100+ years – and if it has significantly shifted, then prices are necessarily more sticky than they used to be – and if so, that might be impinging our recoveries.

What am I talking about? Toss out the idea of marginal pricing. Consider that the amount of money any random person will pay for a pack of gum varies-wildly-depending on 3 things: #1 historical prices, #2 the magnitude of their current need, #3 their available cash.

Consider that #3 has changed a lot as income inequality has grown. And even though a wealthy person tends to be “savvy”, they also tend to like paying a lot for status goods that are mostly identical to common goods. As such, a wealthy person that REALLY wants a piece of gum or is in a rush might pay $5-$100 for a pack of gum. A lower-middle class person would never do that. So if Kwik-E-Mart owners could quote prices to customers, they might make a higher profit margin.

But we’ve come to like our fixed-pricing. The bartering with a salesperson has largely gone away such that now a “salesperson” job is generally barely more than entry-level. That means prices used to be a lot more flexible, possibly.

Another facet: the information age has caused prices to become “known” – subverting haggling everywhere, leading sellers to resist nominal price lowering.

When prices are flexible, they can respond to the “lows” of a recession. This is as “good” for buyers as it is “bad” for sellers. But it’s better for everyone in the sense that it gives the economy less of a hill to climb to recovery. If you are suffering from a lack of aggregate demand, prices that are too-high act just like a weak currency trying to buy imports. They can’t – not in large-enough quantities.

I’m pretty sure someone has probably done analysis like this, but I haven’t tried to search for any. Still, it would be very interesting if this effect is significant – and help illuminate the impacts of income inequality in our current economy. To be clear, the hypothesis is that in an earlier, more barter-friendly economy, those with greater income tended to have to pay more for the same or similar goods, and in the current “list-price” economy (or in the case of higher-status goods that have a higher real cost) more of the money that lands in the bank accounts of the wealthy ends up staying there rather than being circulated as consumption, prolonging the “recovery.”

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About stormculture

In pursuit of reality.
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