DETERMINANTS OF PRICE RIGIDITY: THE ROLE OF PSYCHOLOGICAL PRICES, PRICE CHANGES AND SALES PROMOTIONS

By Ashutosh Goel Section D Roll no. 263

WHAT IS PRICE RIGIDITY ?

Price rigidity is defined as the inability/resistance of a firm to change prices despite the presence of nominal forces or market forces that suggest change in prices. It is measured as the mean duration of unchanged prices. It is a relative rather than an absolute quantity.

WHY IS THE STUDY OF PRICE RIGIDITY IMPORTANT ?

The market power of large retailers has increased significantly as opposed to manufacturers. Their growing concentration and buying power has made them powerful influencers of the market. Thus there is an increase in the retailers ability to influence the prices charged to the consumers and prices paid to the suppliers.

PSYCHOLOGICAL PRICING POINT

The theory of psychological pricing points states that the nominal price points are psychologically so important for consumers, that if the price goes beyond these psychological pricing points, the demand decreases strongly. The firms following psychological pricing strategies would thus start from the presumption of a kinked demand curve.

HYPOTHESIS OF PSYCHOLOGICAL PRICING THEORY

Pricing tends to be rigid at certain ending prices such as 99, $1.19 etc. Consumers are inattentive to rightmost digits as they are constrained by time, resources, and information processing constraints. Since, many consumers ignore the last digit, firms tend to keep the last digit as high as possible.

SOME KEY OBSERVATIONS IN THE STUDY

The number of price promotions is a significant determinant of the rigidity in prices. When sales promotions are considered, the level of price rigidity noticeably increases.

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