Unequal Price Changes

This paper investigates a novel dimension of heterogeneity in price adjustment dynamics: the relationship between a good's relative price within its store-product category and the stickiness of its price. Using high-frequency scanner data from U.S. retail stores, I document two key empirical facts: (1) relatively cheaper goods within a product category adjust prices more frequently, and (2) when these cheaper goods do adjust prices, they do so by smaller magnitudes compared to their more expensive counterparts. To rationalize these empirical regularities, I estimate good-specific demand elasticities using an instrumental variables approach, revealing that cheaper goods face more elastic demand. I then develop a dynamic menu cost model of price-setting. The model demonstrates that goods with more elastic demand (i.e., cheaper goods) optimally adjust prices more frequently but by smaller amounts, as they face steeper profit functions that incentivize staying close to the optimal price. This mechanism provides a microfounded explanation for the observed pricing patterns of frequency and size of price changes.