Consumption Inertia and Asymmetric Price Transmission

By: Xia, Tian; Li, Xianghong


Xia, Tian; Li, Xianghong, Consumption Inertia and Asymmetric Price Transmission, Journal of Agricultural and Resource Economics, Volume 35, Issue 2, August 2010, Pages 209-227

We propose consumption inertia as a new explanation for asymmetric price transmission. Inertia in consumer demand enlarges retailers’ gains in gross profits from raising prices in response to higher wholesale prices and reduces gains from decreasing prices in response to lower wholesale prices. Thus, consumption inertia can cause asymmetries in price transmission whereby retailers are more willing to change their prices, and change them more quickly, in response to wholesale price increases as opposed to wholesale price decreases.