Review of Industrial Organization 18: 397–416, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
The Size and Frequency of Price Changes:
Evidence from Grocery Stores
ELIZABETH T. POWERS
and NICHOLAS J. POWERS
Institute of Government and Public Affairs and
Department of Economics, University of
Illinois, 1007 West Nevada Street, Urbana, IL 61801, U.S.A.
Abstract. We analyze a data set (on grocery store prices for lettuce) with many advantages over
those used previously to explain ﬁrm heterogeneity in the size and frequency of price changes.
Despite common shocks to their input price, grocers’ price changes vary widely in size and frequency.
We test hypotheses emerging from a theoretical framework. We ﬁnd that product, ﬁrm, and market
characteristics associated with the beneﬁts from and costs of changing price explain grocer-to-grocer
variation in the size and frequency of price changes. More concentrated markets, larger ﬁrm size, and
thinner product markets lead to infrequent and large price changes.
Key words: Market environment, net beneﬁt, price changes, price rigidity.
Although classical economics predicts continuous and full adjustment of prices in
response to continuous changes in supply and demand conditions, price rigidity,
the tendency of price not to change, has been well documented for a variety of
markets (Carlton, 1986). Firm heterogeneity in the degree of price rigidity has
also been found within selected industries (Hannan and Berger, 1991; Kashyap,
1995). While the factors inﬂuencing ﬁrms’ price changes are critically important
to understanding the workings of a market economy and, thus, the consequences of
public policy, especially monetary policy (Blinder et al., 1998), empirical studies
of this issue remain rare.
This paper contributes to the literature on ﬁrm pricing behavior by examining
the empirical relationship between the size and frequency of ﬁrms’ price changes
and identifying support for speciﬁc explanations of ﬁrm heterogeneity in the size
and frequency of price changes. Theory predicts that ﬁrms that frequently change
prices make small price changes (Sheshinski and Weiss, 1977). We test for this
stylized fact as well as related ones using grocery store prices of lettuce. There
We thank seminar participants at the Federal Reserve Bank of Cleveland and the University of
Illinois and two referees for helpful comments on an earlier draft. A longer article, containing further
analyses and discussion, is available from the authors upon request.