Hierarchical delays as a source of nominal price rigidities: evidence from the microcomputer industry

The non-market clearing models of New Keynesian macroeconomic theory rely heavily upon sticky prices to generate business cycle activity following monetary shocks. The dominant theoretical explanations for sticky prices assume a degree of market power in the representative firm (e.g. Mankiw, 1985. Quarterly J. Econ. 100 (2): 529-538). Thus, an important element of empirical research is the exploration of sticky prices within more competitive industries. The importance of this analysis is in establishing the potential degree of price stickiness in a representative firm employed in a macroeconomic model. Among the many theoretical explanations of nominal rigidities are the existence of hierarchical delays (Blinder, 1991. Amer. Econ. Rev. 72 : 334-348) and decision costs (Tommasi, 1992. Optimal Pricing, Inflation, And The Cost of Price Adjustment, 485-511). Both theories rely on the simple notion that managerial inefficiency, high costs of making decisions and sluggish transmission of information lead to price stickiness. This paper investigates the market for microcomputers in the United States from 1993 to 1995 finding strong evidence of nominal price rigidities attributable to hierarchical delays. Alternate explanations for these rigidities are explored and rejected. These prices are sticky in a monopolistically or workably competitive industry, which provides important additional support for the New Keynesian interpretation. Ordinary least squares, a Poisson count and negative binomial count models are employed in establishing the existence of hierarchical delays. Conclusions are offered regarding the appropriate selection of the characteristics of the representative firm in macroeconomic models. Copyright © 2007 John Wiley & Sons, Ltd.