How and when do business adjust for inflation?
In: Economics
Some businesses are constantly changing their prices to reflect changes in underlying costs (e.g. gas stations). Most don’t do this and instead change prices very occasionally. A leading explanation for this in economics is “menu costs”. The name comes from the idea that if a restaurant wanted to change its prices every day, it would also need to print new menus every day. It’s very possible that the “menu cost” of changing prices outweighs the greater revenue a firm would get from just raising prices by 1 or 2 cents. Instead, they space out their price changes to avoid paying menu costs too often.
Another thing to consider is that most consumer products are not bought directly from the manufacturer. Instead, the manufacturer is selling their product to a retailer, and the retailer chooses their own price to post on the shelf. Retail pricing is its own complicated problem full of sales, coupons, and loss leaders. Retailers don’t necessarily just apply a constant markup to whatever they paid the manufacturer. Therefore, the manufacturer may actually be changing the price they charge the retailer, it just doesn’t immediately show up for you.
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