At the core of every contemporary analysis of the macroeconomy sits an assumption about how prices are determined. These assumptions tend to be ad hoc, usually allowing for some but not all prices to be changed in a given period. Price (and/or wage) rigidity is often crucial for macroeconomic models to generate real economy responses to demand-side disturbances or policy interventions.

How closely these assumptions resemble pricing decisions in the real world is difficult to say. Unless one were to directly ask sales directors and marketing managers across the economy.

This is what Prof Truman F. Bewley of Yale University set out to do. His book ‘Price Setting’ reports findings from 563 interviews at over 500 largely US-based companies conducted over the span of nearly two decades – an impressive endeavour. While its somewhat repetitive structure and thin narrative don’t lend themselves to an easy reading experience, the book shines with verbatim quotes from numerous interviews. These quotes transport the reader to boardrooms at large and small companies, facing very different figures from the corporate world, each providing their own very particular insights.

A main lesson from those numerous discussions is, perhaps unsurprisingly, that pricing decisions are complex. They depend on many factors, including how well the product distinguishes itself from alternatives, the level of competition, the sector, and so on. While prices of undifferentiated products – those competing against very similar alternatives – tend to be volatile and responsive to demand, prices of more differentiated products move only sluggishly: they never really fall, rise only occasionally, and rarely respond to wider economic conditions. This is because undifferentiated products are often priced using formulas that draw on surveyed prices of similar goods. Prices of differentiated products, on the other hand, are more rigid for a range of reasons. These include long-term contracts, especially if the product is an input into another production process. Outside of strictly time-limited offers, sellers are reluctant to lower their prices for fear of not being able to bring them back up. Customers tend to strongly dislike price increases and demand often seems little price elastic, in particular if the good or service sold is fairly unique. In fact, changing the price often is seen by price setters as a distraction from the product’s quality and therefore avoided.

The lesson for macroeconomists is that an aggregate pricing function with forward-looking and backward-looking elements, and some form of downward rigidity may indeed be a good approximation for real world complexities. More generally, the book illustrates the value of directly engaging with company decision-makers. In the UK, the Bank of England’s Agents or the CBI’s business surveys build on a similar premise.

A few open questions remain. As Bewley conducted his interviews during a period of low inflation, the book can’t shed light on what makes prices move suddenly and simultaneously, for example during the recent high inflation episode. The author also deliberately stops short of drawing wider macroeconomic implications from the microeconomic evidence.