Business and economics

(1) In textbook markets, prices adjust continuously to changes in cost and demand. Yet many firms change the prices they charge only rarely, even when their circumstances have plainly shifted. Economists long explained this stickiness by pointing to "menu costs": the expense of reprinting catalogues, relabelling shelves and updating price lists. Because every change is costly, the reasoning goes, a firm waits until the gap between its current price and its ideal price is large enough to justify the expense.

(2) The menu-cost account has lost force as its central premise has eroded. Retailers that display prices on electronic shelf labels, and online sellers that can alter a figure with a keystroke, face almost no mechanical cost of repricing, yet many of them still adjust prices far less often than their changing costs would seem to warrant. Something other than the price of relabelling must be restraining them.

(3) Surveys of managers point to a different consideration: customers' judgments of fairness. Buyers tend to accept a price rise that is visibly tied to higher costs, such as a bakery charging more after flour becomes expensive, but they resent a rise that appears to exploit a temporary surge in demand, such as a shop raising the price of umbrellas during a downpour. A firm that is seen to profit from its customers' predicament may gain a little revenue today and lose far more in future custom. Frequent price changes also invite scrutiny: a customer who notices prices moving from week to week begins to wonder which of the changes are justified.

(4) The fairness account also explains a pattern that the menu-cost account cannot. Relabelling costs the same whatever prompts a price change, yet firms are noticeably more reluctant to raise prices when demand has surged than when their costs have risen. Firms do still respond to demand, but often less conspicuously: by shrinking package sizes, withdrawing discounts, or letting a popular item sell out rather than raising its price. Stickiness, on this view, is less a failure of firms to keep up with the market than a strategy for preserving the trust on which repeat business depends.