What are Sticky Prices? A Guide to Price Stickiness

In this article, we will talk about sticky prices. "Sticky" in this case means resistant to changes in supply and demand, general market trends, or inflation. That is, sticky prices for goods practically do not change, regardless of conditions.

Below, we will analyze in more detail how sticky prices can arise, how to get rid of price stickiness, and also compare flexible and sticky prices.

Price stickiness is a phenomenon in which, despite market changes, the price of a product remains unchanged or changes very slowly.

It goes without saying that the supply and demand rule should apply to all market prices. When demand falls, the price falls, and when demand increases, the price increases. This allows the market to function successfully. When prices respond to demand in a timely manner, an equilibrium price is reached.

But sticky prices can upset this balance. If the price of a product fails to adapt to market conditions in time, this will entail consequences for the efficiency of the economy.

On the scale of a single company, rigidity of prices can cause financial losses and stagnation of goods in stock. On a macroeconomic scale, price imbalances can cause losses of investments, problems with output and consumption of products, and employment issues.

Sticky prices make the market inefficient due to non-equilibrium. The faster prices adapt to changes in the market, the more efficient the market gets.

There are several reasons why sticky prices may occur:

- The cost of repricing goods. This situation is unlikely in e-commerce, however, as price changes can occur quite often; still, you should be prepared for this factor.

- Misinformation about the market: for example, unreliable sources or poor collection and analysis of information.

- Irrational decisions of company managers. Some firms will try to keep prices constant as a business strategy, even though it is not sustainable based on costs of material, labor, etc.

In 2015, there was a crisis in India due to sticky prices. The state considered it necessary not to interfere. Most believed that the market itself would come to an equilibrium, but it did not happen.

Since then, in similar situations as in India, the state intervenes in pricing policy to prevent a crisis, because equilibrium will not happen by itself.

Imagine the following situation: initially, tomatoes on the market cost $2 per kilogram. But at some point, farmers start to strike because of inflation and working conditions. The strike affects the supply of tomatoes: supply is decreased, and the price of tomatoes rises to $6 per kilogram.

After some time, the government responds to the farmers’ demands and the strikes stop. However, the price remains $6 per kilo. This is also an example of a sticky price. Usually, in such cases the price is either slowly adjusted or does not change at all and is later leveled by inflation.

Price stickiness can occur if a price moves in one direction with little resistance. For example, a price may stick to a higher range if it moves down easily but grows with difficulty. And vice versa: if the price can grow quite confidently, then it is likely that it will stick to the lower range. Therefore, when the implied market-clearing price drops, the observed market price remains artificially higher than the new market-clearing level, resulting in excess supply (surplus).

The concept of price stickiness can also apply to wages. When sales fall in a company, the company doesn’t resort to cutting wages. When a person becomes accustomed to earning a certain wage, they are not normally willing to take a pay cut, so wages tend to be sticky.

Here, we will look at several solutions that will help eliminate the phenomenon of sticky prices.

Knowing your expenses and understanding where they come from is the basis of any enterprise. Structuring your income and expenses allows your business to function successfully. Also, analyzing your expenses will help you to reconsider your pricing strategy if your prices are sticky. It depends on the case, however: perhaps another fixed price strategy will suit you. But in any case, you need to understand which strategy harms your business, and which brings profit.

This concept is related to the previous one. In addition to understanding your income and expenses, you need to have a clear understanding of your business model: before you lower your prices, you need to make sure that this pricing policy won’t harm it.

If you know how much the customer is willing to pay for your product, you will know how much you can raise or lower the price. Obviously, you can’t make such decisions by blindly guessing: your pricing strategy should be based on statistics and data about your customers. Various optimization, scraping and parsing software can help you with this.

An honest dialogue with your customers is the best way to build a pricing strategy. First of all, your prices must be appealing to them: this is the key to a successful trading business.

Choose an equilibrium price based on your customers’ opinions and purchasing power, as well as the general economic situation. These factors can constantly change, so your prices will change too, thereby avoiding stickiness. But, again, it’s not only important to make sure prices don’t stand still; it’s important to change prices carefully and competently.

Flexible prices are the opposite of sticky ones. Thus, flexible prices are susceptible to a variety of factors and can often rise or fall. Goods with flexible prices include commodities that constantly adjust their prices, such as gasoline, and the broader idea of flexible pricing encompasses some more specific pricing strategies.

For instance, the practice of segmented pricing — like when movie theaters offer discounted prices for seniors and students — falls under the umbrella of flexible pricing. The same goes for a construction contractor being willing to negotiate their prices with clients based on the scale of a job.

A sticky price policy can be successful in rare, specific cases. But on a global scale, prices will still not stand still, at least because of inflation.

We hope that this brief guide to sticky prices was useful for you. Summing up, we can say that a sticky price strategy, no matter whether the manufacturer intentionally or accidentally creates it, in most cases has negative consequences for enterprises.

Now you know how to avoid sticky prices, but we also suggest that, in order to create an effective pricing policy, you may need price optimization software, such as Priceva’s Retail Price Optimization.

Prices are sticky when they do not adapt to market changes or customer purchasing power. The product may either depreciate or become too expensive, which will lead to a decrease in demand: goods will lie idle in the warehouse, and businesses and consumers will both suffer.

It will depend on your particular business. There are two aspects regarding costs: pricing costs (service fees for price optimization, for example) and payment for losses that your business may incur. Setting sticky prices is cheap, since it doesn’t require complex calculations. Still, there is a high probability that this strategy will fail, and then you will have to pay for the losses that your business will incur.

The opposite of sticky prices is flexible prices. Sticky prices are static, and flexible prices are dynamic. Flexible prices are susceptible to several factors such as changes in the market, demand, inflation, and other things that may affect the price of goods.

Over the long run, prices can never be sticky. For example, it’s impossible to resist inflation, not to mention other factors. Therefore, over a period of 10-20 years even the most sticky prices will change.