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Abstract
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.