The Effects of Focal Points and the Strategic Environment on Nominal Price Inertia

Prior laboratory experiments have suggested that prices and expectations are flexible when firms' prices are strategic substitutes but sticky when they are strategic complements. I argue that the observed asymmetry is influenced by focal points in the participants' payoff tables across treatments. I manipulate the focal points in a set of laboratory experiments and find that the asymmetry in initial price adjustment is reduced by 59%. The residual asymmetry appears to be due to the fact that strategic substitutability reduces the number of strategies that participants saw as viable