Why Did the Price Not Change? Reprinting the Menu Costs More Than the Rise
By the BrainSnail editorial team. How these articles are written and checked, and how to tell us when one is wrong.
Changing a price is not free, and the small costs of doing it explain why prices move in jumps rather than smoothly, which has large consequences for how the economy behaves.
What the costs are
Adjusting a price involves real expenditure beyond the decision itself. Materials carrying the old price must be replaced, from printed menus and catalogues to shelf labels and signage. Systems and databases have to be updated and checked. Staff must be informed and retrained. Customers must be told, and contracts may have to be renegotiated. There is also a cost in attention, since deciding what the new price should be takes managerial time that has alternative uses. The name comes from the clearest example, and the category is much wider than restaurants.
What follows from them
Small frictions produce a specific pattern of behaviour:
- •Prices are changed in occasional jumps rather than continuously
- •Firms wait until the gap is large enough to justify the cost
- •So prices lag behind changing conditions
- •Different firms adjust at different times, so relative prices distort
- •A firm may change quantity or quality instead of price
- •Small changes in demand are absorbed rather than priced in
Why economists care
The concept does substantial theoretical work, which is why a small practical observation has a large literature. If prices adjusted instantly and costlessly, changes in the money supply would move all prices together and affect nothing real, so monetary policy could not influence output or employment at all. Sticky prices break that, because a change in demand met by unchanged prices must be met by changing quantities instead, meaning production and employment move. The concept therefore supplies a microeconomic foundation for the claim that monetary policy has real effects, which is the central claim of a whole school of macroeconomics.
What firms do instead
Faced with a cost of changing the number, businesses reach for adjustments that avoid it, and recognising them is useful as a customer. Package sizes shrink while the price holds, which is common enough in groceries to have acquired a popular name. Quality or ingredients are quietly downgraded. Delivery charges, service fees and surcharges are added alongside an unchanged headline price. Discounts and promotions are withdrawn, which raises the effective price without changing the listed one. And the list price is held while the terms are tightened, which is the standard approach in business to business contracts.
What has changed recently
Technology has cut the cost of changing a price close to zero in several sectors and the consequences are visible. Online retailers adjust prices continuously by algorithm, with some large sellers changing millions of prices a day. Electronic shelf labels remove the printing cost in physical shops. Ride hailing and airline pricing move with demand by the minute. The result is that stickiness is disappearing where the technology has arrived and persists where it has not, which makes the modern question less about whether prices are sticky and more about which prices, and at what cost to the customer's sense of fairness.
The takeaway
Changing a price costs something in materials, systems, staff time and managerial attention, so firms wait until a change is worth making and prices move in jumps. That stickiness means a change in demand shows up in production and employment rather than only in prices, which is how monetary policy gets real effects. Electronic pricing has removed the cost in some sectors and not others.