adhesion

What is stickiness?

A sticky decline is a tendency for the price of a commodity to rise easily, although it does not fall easily. It is related to the term price stickiness, which refers to the resistance of a price or set of prices to change. Price declines can be due to imperfect information, market distortions, or decisions to maximize profits in the short term.

For consumers, if the prices of certain items appear sticky, it may cause anger and resentment, as they may perceive it as an attempt to deceive consumers.

key takeaways

  • A sticky decline is a tendency for the price of a commodity to rise easily, although it does not fall easily.
  • Sticky prices are related to the term price stickiness, which refers to the resistance to changes in price or a set of prices.
  • Price declines can be due to imperfect information, market distortions, or decisions to maximize profits in the short term.
  • Consumers are acutely aware of sticky market effects for goods and products they cannot live without and those that can take advantage of price fluctuations.

How Sticky-Down Works

Sticky-down is often used to refer to the price of oil. Consumers are acutely aware of sticky market effects for goods and products they cannot live without and those that can take advantage of price fluctuations. In the case of gasoline, consumers are less likely to return from the gas station without topping up, simply because the price of fuel is a few cents higher than it would be without sticky pricing.

Historically, U.S. policy decisions in certain periods have resulted in sustained price increases for gasoline, diesel and other crude products. This was especially true in the late 1970s when the United States faced the 1979 energy crisis. At this point, the price of crude oil more than doubled—from December 1978 to June 1980. There was little, if any, significant decline.

News outlets at the time pointed to the Iranian revolution as the root cause of the drop in oil prices; this was partly true. However, the price hike also has a lot to do with fiscal policy, including U.S. regulators’ decision to limit gasoline supplies early in the crisis to build up inventories.

The sticky decline could also be related to the fact that gasoline and other energy commodities are on an uptrend and are slow to respond to lower crude oil base prices. For example, suppose crude oil is in a strong uptrend and rises above $100 a barrel. Retail prices are generally expected to be roughly in line with the rise in oil prices, and sometimes faster. Suppose, however, that crude oil prices suddenly drop by $10 a barrel, or 10%, overnight due to increased supply from the Middle East. Gasoline futures may fall as a result. However, gas prices at local gas stations may not change, as gas station owners still find it difficult to secure supplies at lower prices. Or, maybe the site owner just wants to slowly lower the price to maximize profits. In this context, gasoline prices at the local level can be said to be sticky.

Sticky-down also works for soft goods. For example, if soybean oil prices are slow to respond to a decline in soybean prices, soybean oil prices will be in a sticky down market.

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