What it is:
Price stickiness refers to the price persistence of a good, service, security or economic measure (like wages) despite changing economic conditions.
How it works (Example):
Prices can be sticky on the way up or sticky on the way down, meaning that they move in one direction easily but require great effort to move in the other direction.
Wages are a good example of price stickiness. Wages tend to trend upward with the rate of inflation, and as a person becomes accustomed to earning a certain wage, he or she is not normally willing to take a pay cut. Pay rate is perhaps the last thing that an employee will negotiate on, only after ceding fewer hours, a decrease in benefits, etc. Only dramatic events like recessions or long periods of unemployment will cause a decline in average wages. Hence, for economic and psychological reasons, wages tend to be sticky.
Why it Matters:
From an economic perspective, price stickiness represents inefficiency in the market. After all, when supply and demand change, the equilibrium price should change. Stickiness keeps that from happening, making it one of the most important and unresolved questions in macroeconomics. Reducing price stickiness benefits companies and consumers most when supply and demand are inelastic. As a result, understanding price stickiness is a crucial component of devising effective marketing strategies and making pricing decisions.