A Slate.com article links to an interesting paper, "'The Real Thing': Nominal Price Rigidity of the Nickel Coke, 1886-1959." This article explains why Coca-Cola cost 5 cents during that 70-plus year period. The facts are really fascinating! Coke could not easily raise the price for various reasons. First, because soda bottle machines only took nickels. So, the price would have to be raised 100%, to 10 cents because the machines didn't give back pennies. Also, Coke had entered into some long-term contracts that constrained price increases. I was mostly interested in the customer inconvenience concern.
I've always wondered how long the New York Times will be $1. (I vaguely remember when it was 75 cents, but I can't say when that was.) To increase beyond a dollar will cause a bit of inconvenience. Newspaper stand machines seem to just take quarters, so the increase would have to be to $1.25 or $1.50. At many newsstands, one can just put in a dollar and take the paper without having to wait for change. So the price of many products, including the NYT, can't fluctuate perfectly, but only when the price can be raised to a convenient level. I would suppose that $1 is the perfectly convenient level, so that price would be sticky. Can anyone think of other products with convenient prices?
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1. Posted by Jeff Lipshaw on May 15, 2007 @ 7:58 | Permalink
My guess is that the overall production and distribution costs have gone down, commensurate with the general increase in productivity over the last twenty years. I don't think changing newspaper boxes to $1.25 or $1.50 is that big of a deal, and intuitively just doesn't seem to me to be a reason for price stickiness.
Remember also that the selling price of the paper itself pales in comparison to ad revenue, so it's a subtle calculation if increasing the price of the paper decreases circulation and hence reduces ad revenue.
2. Posted by Archit on May 15, 2007 @ 8:10 | Permalink
Public transit can face the same problem. In Boston, however, the MBTA managed to create the opposite problem. Bus fares were $0.60, then $.90 and have just been raised to $1.50. Missed the $1 sweet spot entirely. Just to be more entertaining, subway tokens have always been worth about a quarter more than the bus fare.
3. Posted by Nobody on May 15, 2007 @ 8:32 | Permalink
I don't know if it's still the case--I haven't made a purchase in quite a number of years--but a piece of Bazooka bubble gum was 5 cents for the longest time.
4. Posted by Jeff Lipshaw on May 15, 2007 @ 8:34 | Permalink
But with a Charlie Card, the coinage doesn't make a difference. The tougher question is how many times you need to use the T to justify a monthly pass.
5. Posted by wingsandvodka on May 15, 2007 @ 8:54 | Permalink
Being born into the world of the 25-cent postage stamp and the 25-cent phone call, those always struck me as intuitive, necessary price levels, and I think that we've cared a lot less about subsequent price bumps than we did the raise from a quarter.
I've also wondered if the actual bar to Puerto Rico's statehood isn't based in numbers. If, for whatever reason, Alaska had been admitted as two states, bringing the total to an even fifty, doesn't it seem likely that Hawaii would now be in a PR-like situation?
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