Consumer Reports: Why Haven't Prices Dropped?

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The costs of commodities have tumbled from their sky-high perch of last year, but prices at the supermarket haven't sunk in sync. Why?

According to Lars Perner, assistant professor of clinical marketing at the University of Southern California's Marshall School of Business, the answer is sticky pricing. That's the term economists use when companies charge higher prices even though the excuse for them no longer exists. And the practice isn't limited to grocers. Many hotels, airlines, and rental-car agencies still tack on energy surcharges (from when fuel hit its all-time-high prices), for example.

Why Prices Are Stuck
Companies often base prices on what the competition is charging, not on production cost, Perner says. The first company to hike prices risks losing customers to a competitor that holds the line. On the flip side, a company that undercuts a competitor could ignite a price war. So there's a lot at stake. "If stores stick together, prices tend not to come down," Perner says. "No one wants to blink first," out of fear that others will follow.

Manufacturers may also be reluctant to drop prices out of concern that good times won't last. By keeping the existing price, the theory goes, companies avoid antagonizing buyers down the road and can meanwhile keep a chunk of change.

Another reason for hesitation is loss aversion, according to Harvard Business School professor John T. Gourville. Loss aversion means that people get more pain from a price increase than pleasure from an equal decrease. "As a manufacturer, only if you are sure that the price decreases are fairly long-term would it make sense to drop your prices again," Gourville says. "The last thing a manufacturer wants to do is be yo-yo-ing his prices."

To be fair, companies don't always pass along their own extra costs to consumers. When the cost of jet fuel spiked, airlines didn't raise prices enough to cover costs fully. So sticky prices can be a way to recoup lost profits. Still, Gourville says, "Consumers have a right to be cynical."

You will pay less for some things, such as houses, of course; some vacation destinations; and event tickets on the resale market.

 

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