Another Reason for Sticky Prices

By Rosemary Lu

The Economist wrote about the rise of prices at grocery stores and at restaurants due to the rise in costs for foods such as eggs, milk, corn, and wheat, as well as the cost of electricity and fuels that add to the transportation costs. Although some of the cost of these new price hikes have been passed down to the consumers, and I have personally noticed the prices of eggs and milk increasing at our local Trader Joe‘s, the article explains there are different tactics food companies and restaurants have been trying to do to keep from changing their prices.

“Restaurateurs are trying to avoid passing the higher cost of ingredients on to customers by increasing productivity—by training waiters to double as kitchen hands, for example.” [link]

Not only are restaurants “training waiters to double as kitchen hands” but food businesses have been changing their recipes and the way they package their foods so they can keep prices down. These innovations by the food companies and restaurants are another reason that although prices should fluctuate more, they are kept sticky!

On the other hand, these tactics by the food industries can also be seen as forms of the sticky price reasons that we have discussed in class. For example, the reason that restaurants may want to find other ways to keep prices down, may be due to the cost of changing the prices on their menu. Therefore, in this case, the menu costs have the double meaning in both economics as well as the idea that is based off restaurants having to print new menus.

In addition, pushing their waiters to work harder, or to double as workers in the kitchen and in the restaurant increases their marginal productivity of labor. Assuming that the waiters are doing a good job helping in the kitchen, they are improving their labor productivity and doing more for their money. This falls under the category of the irrational economic agents, where maybe before they did not calculate their point of max MPL, but now that they have more pressure to do so, they must get more work out of their employees.

And to add to the worries or faith that people have in the current workings of the economy, imperfect information could possibly be another factor in explaining sticky prices in the food industry. Perhaps they feel that the economy is going to get better and that the prices of food will decrease eventually, therefore experimenting with the recipe or overworking their waiters could be a good short term solution. However, if perhaps they knew/felt that this economy would not be getting better they would just start raising prices now. I suppose that this last one is a little difficult to know for anyone because as we’ve discussed in class, many economists feel that economics itself is filled with imperfect information.

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