Price Stickiness

Article byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

Price Stickiness Definition

Price stickiness is a real-world scenario where once inflated; the price does not fall back to optimal levels. Even in optimal conditions, the price sticks to the inflated range. Such markets do not comply with the law of supply and demand. 

Price Stickiness is also referred to as sticky prices. Inflation, shortage or lack of supply, and economic shift play a key role in increasing the price of a particular product. The sticky wage theory was introduced by John Maynard Keyes.

Key Takeaways

  • Price stickiness refers to the market tendency where price remains constant after hikes—it does not fall back to optimal levels.
  • The stagnation of price hikes could be brought out by lack of competition, monopoly, shortage of goods, unavailability of similar products, consumer choice, lack of options, or consumer needs.
  • The sticky wage theory highlights how wages grow very slowly—even in scenarios of inflation and unemployment.
  • Though wages increase slowly, employees keep working. This is due to inflation, personal liabilities, lack of income sources, and unemployment.

Price Stickiness Explained

Price Stickiness

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Price stickiness refers to scenarios where markets don’t comply with the law of supply and demand. Theoretically, when demand declines and supply increases, economists expect a fall in price. But in real-world scenarios, markets do not always follow the demand-supply theory.

Prices have a tendency of remaining constant or declining very slowly—price stickiness. This could be due to lack of competition, monopoly, shortage of goods, unavailability of similar products, consumer choice, lack of options, or consumer need.

In many markets, when the price of a commodity rises due to certain factors, it shifts to a higher price range. But, very often, the price does not fall back, even after resolving underlying issues. Instead, the price stagnates, sticks to the higher range, and does not return to optimal levels.

In such market scenarios, products become unreasonably overpriced—triggering permanent inflation in the market. Sticky prices remain constant irrespective of supply, demand, or the availability of certain goods.

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Let us look at some examples to better understand the practical application of this concept.

Example #1

In 2015, sticky prices were deepening inflation in India. However, some people believed that it would self-adjust. Outside intervention was not seen as necessary. 

Sticky prices are very real; they can quickly trigger an onslaught of recession. Many economists argue against the law of supply and demand—they highlight the flaw in the price mechanism. Price may lack self-regulation. They do not always adjust back to optimal levels.

Contemporarily, economists advocate governmental or external intervention to deal with sticky price scenarios. For regulating the cost of goods and services, the concerned authority must take timely action. Central banks use the sticky-price model. Flexible price models are not used anymore.

Example #2

Let us assume there is a local market where tomato is sold at the retail price of $1 per pound. Suddenly, farmers stop harvesting and go on a protest. The protest was brought out by soaring inflation and the government turning a blind eye to farmer rights.

The protest causes an acute shortage of tomato supply. Tomatoes are now sold at an inflated price of $3 per pound. Within three weeks, the government agrees to the farmers’ demands. Normalcy resumes, farmers harvest tomatoes, and supply levels rise to normal. Despite all that, the price of tomatoes sticks to $3 per pound.

This tendency of price is called sticky prices or price stickiness. What was once sold at $1 per pound, established itself as a commodity that costs $3 per pound. In time, the price can decline. But usually, price declines are slow—permanent inflation is triggered in most instances.  

Wage and Price Stickiness

Following are the salient features of wage and price stickiness:

Frequently Asked Questions (FAQs)

How would you define price stickiness?

It is an economics theory. Often, prices tend to remain constant and stick to a higher range. However, despite optimal conditions, prices either refuse to decline or decrease very slowly.

What causes price stickiness?

The critical reason for price stickiness is inflation. Due to temporary wage pushes or expected inflation, product prices rise above their optimal price range. Later, when optimal factors resume, the price tends to stick. Price stagnates at the higher range. Stickiness in pricing is caused by heavy regulation, monopoly, and imperfect market structure.

What are some examples of sticky prices?

Let us assume that hotels and bars hike the prices of food and drinks due to inflation. Even when the demand for vegetables and groceries falls, the restaurants won’t decrease their hiked menu. On the contrary, restaurants stick to inflated prices even if customers find them unreasonably expensive.

This has been a guide to Price Stickiness & its meaning. We discuss price stickiness strategy, wage stickiness theory, and product pricing using examples. You may also have a look at the following articles –

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