Price Stickiness in the US and Europe Revisited: Evidence from Internet Prices*
| Author | Ladislav Wintr,Patrick Lünnemann |
| Published date | 01 October 2011 |
| DOI | http://doi.org/10.1111/j.1468-0084.2011.00657.x |
| Date | 01 October 2011 |
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©Blackwell Publishing Ltd and the Department of Economics, University of Oxford, 2011. Published by Blackwell Publishing Ltd,
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OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 73, 5 (2011) 0305-9049
doi: 10.1111/j.1468-0084.2011.00657.x
Price Stickiness in the US and Europe Revisited:
Evidence from Internet Prices*
Patrick L ¨
unnemann and Ladislav Wintr
Banque centrale du Luxembourg, 2, boulevard Royal, L-2983 Luxembourg
(e-mails: patrick.lunnemann@bcl.lu; ladislav.wintr@bcl.lu)
Abstract
This paper compares price stickiness on the Internet and in traditional brick-and-mortar
stores and examines differences across five countries: France, Germany, Italy, the UK and
the US. Contrary to conventional retail prices, we find that Internet prices change less often
in the US than in EU countries. However, this does not hold for all product categories.
Second, prices on the Internet are not necessarily more flexible than prices in brick-and-
mortar stores. Third, our dataset reveals substantial heterogeneity in the frequency of price
changes across Internet shops. Finally, panel logit estimates suggest that the likelihood of
observing a price change is a function of both state-dependent and time-dependent factors.
I. Introduction
The assumption of rigid price adjustment is an important feature of New Keynesian
Economics that gives rise to non-neutral effects of monetary policy in the short run. A
large body of empirical research set out to investigate the extent of sluggish price adjust-
ment and potential sources of price stickiness. In the US, Bils and Klenow (2004) pioneered
an approach that employs disaggregate price quotes to study price rigidity. In the euro area,
the Eurosystem Inflation Persistence Network (IPN) provided comprehensive evidence on
price setting based on individual consumer and producer prices (see ´
Alvarez et al., 2005a).
Recently, the evidence for the US was extended by Nakamura and Steinsson (2008) and
Klenow and Kryvtsov (2008).
In spite of the recent research, the findings from the micro level studies remain incom-
plete. First, even though there is evidence pointing to a higher frequency of price adjust-
ment in the US than in the euro area (see Dhyne et al., 2006), we cannot exclude that such
differences are due to divergence in the choice of the elementary products, outlet structures,
ÅThe study has been undertaken in the context of the Eurosystem Inflation Persistence Network (IPN). Wethank
Silvia Fabiani, the editor Jonathan Temple, an anonymous referee, as well as colleagues and members of the IPN
for their constructive and helpful comments. An earlier version of this paper appeared under the title ‘Are Internet
prices sticky?’ as working papers of the European Central Bank and the Banque central du Luxembourg.The views
expressed in this paper are personal views of the authors and do not necessarily reflect those of the Banque centrale
du Luxembourg.
JEL Classification numbers: E31, L11, C25.
594 Bulletin
periods under investigation, institutional differences etc. Second, ´
Alvarez et al. (2005a)
report that producer prices change slightly more often than retail prices. Whereas this might
suggest that the retail sector adds to the sluggishness of price adjustment, the evidence is
inconclusive. Third, while evidence from surveys among euro area firms suggests that the
sluggishness of price adjustment depends on the degree of (perceived) competitiveness
(see Fabiani et al., 2006), so far, there is only limited evidence on the role of competition
(see, for example, ´
Alvarez et al., 2010).
The aim of this paper is to address some of these shortcomings and to supplement the
evidence based on consumer price index (CPI) prices by analysing the Internet market.1
The Internet has greatly affected consumer decisions by lowering search costs and reducing
information asymmetry (Ellison and Ellison, 2005). The retail e-commerce sales in the US
grew on average by 25% per year between 2000 and 2007 and accounted for 3.4% of total
retail sales in the fourth quarter of 2008 (US Census Bureau, 2009). UK shoppers did about
5% of all their retail spending online in 2007, compared to 1.6% in France (Mintel, 2008).
Mintel forecasts that online retail spending in France and the UK will triple by 2012. This
ongoing change in the traditional outlet structure of a representative consumption basket
has had very little impact on the price collection practices of national statistical institutes
so far though.2
Admittedly, the dynamic evolution of the Internet market, its maturing and specifics
of the Internet technologies might influence business strategies and the pricing behaviour
of Internet sellers. Thanks to the Internet sellers can adopt new strategies such as rapid
reactions to promotions, price tracking, price signalling etc. (Kauffman and Wood, 2007).
As in the analysis of CPI data, we cannot exclude that our results are affected by the be-
haviour of new firms entering and/or seeking to foster their market position. But these
effects might be more important for the Internet, given that some online markets are
unlikely to have reached maturity.
The analysis of Internet data contributes to the literature on price stickiness along differ-
ent dimensions. First, since our dataset includes narrow product groups (such as fridges or
digital cameras) our results compare more precisely across countries than results from indi-
vidual CPI studies. Wecan even restrict our analysis to a subset of identical matched models
offered in all countries. Second, we control for cross-country differences in the structure
of Internet sellers. Third, Internet prices can be collected at high frequency allowing for
much shorter measured durations of price change than standard CPI data and monitoring
interaction between sellers. Fourth, while the analysis of CPI prices is subject to substantial
publication lags, Internet prices can be analysed in quasi real time.
The paper evaluates price stickiness on the Internet in France, Germany, Italy, the UK
and the US. Where possible, we also compare the degree of price stickiness on the Inter-
net with estimates reported for the traditional retail sector. Finally, the paper studies the
determinants of price changes, including the role of competition.
1Only a few studies have analysed price stickiness on the Internet. Prices of books collected from Amazon and
Barnes & Noble were studied by Chakrabarti and Scholnick (2005), who report a weekly frequency of price change
of 4%. Bergen, Kauffman and Lee (2005) collected data from the same US online booksellers with daily frequency.
They report an average duration of approximately 90 days.
2Depending on the relative importance of online shopping for consumer expenditures in specific product categories,
the US Bureau of Labor Statistics may collect prices from Internet sellers.
©Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2011
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