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Convenient Prices, Currency, and Nominal Rigidity: By Edward S. Knotek II*
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Abstract Newspapers, movie tickets, and concession stand items typically charge prices that facilitate rapid, simple transactions: their prices often coincide with available monetary units, require few pieces of money, or require little change. In this sense, these prices are more convenient than other proximate prices. I model a firm that explicitly incorporates convenience into its pricing decisions, where convenience is quantified by the number of currency units in a transaction. The model illustrates how alternating periods of price rigidity and flexibility can arise in such a setting, along with rapid switching between convenient prices. I compile time series data on newspaper cover prices and use simulations to show that convenience is an essential component of these prices. In the empirical data, firms set prices that were more convenient than adjacent prices 61% of the time. Standard menu costs cannot replicate this behavior. Because convenience appears to affect many of the consumer goods and services with the stickiest prices in the U.S. economy, studies focusing on very sticky prices must be cognizant of convenience’s role in effecting above-average price rigidity. Keywords: Convenient prices, relative inconvenience, price rigidity, menu costs, indirect inference, newspaper pricing history JEL classifications: E31, D40, C15, N81, N82 *Edward S. Knotek II is an economist at the Federal Reserve Bank of Kansas
City. I thank my dissertation committee—Bob Barsky, Chris House, Miles
Kimball, and Valerie Suslow—for numerous comments and discussions about this
paper, as well as Susanto Basu, Stephen Cecchetti, Andrew Coleman, Yuriy
Gorodnichenko, Daniel Levy, Matthew Shapiro, Jonathan Willis, Andrew Young,
and participants in seminars at the University of Michigan and the economics
academic job market. This is the revised first chapter of my dissertation.
The views expressed herein are solely those of the author and do not
necessarily reflect the views of the Federal Reserve Bank of Kansas City or
the Federal Reserve System.
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