Prices Rise Faster than They Fall

TLDR

Prior research documented price asymmetries in a few markets such as gasoline and agriculture, but this study expands the analysis to a broader set of goods. Unlike past studies that focused on a few markets, this study examines a broad set of goods. Prices respond more quickly and strongly to cost increases than to decreases, with positive shocks producing at least twice the immediate response of negative shocks, a pattern that persists for five to eight months across more than two-thirds of the 242 markets studied.

Abstract

Output prices tend to respond faster to input increases than to decreases. This tendency is found in more than two of every three markets examined. It is found as frequently in producer goods markets as in consumer goods markets. In both kinds of markets the asymmetric response to cost shocks is substantial and durable. On average, the immediate response to a positive cost shock is at least twice the response to a negative shock, and that difference is sustained for at least five to eight months. Unlike past studies, which documented similar asymmetries in selected markets (gasoline, agricultural products, etc.), this one uses large samples of diverse products: 77 consumer and 165 producer goods. Accordingly, the results suggest a gap in an essential part of economic theory. As a start on filling this gap, the study finds no asymmetry in the resonse of an individual decision maker (a supermarket chain) to its costs, but it finds above‐average asymmetry where a cost shock is filtered through a fragmented wholesale distribution system. It also finds a negative correlation between the degree of asymmetry and input price volatility and no correlation with proxies for inventory costs, asymmetric menu costs of price changes, and imperfect competition.