The genesis of New Keynesian economics was in fact an attempt to establish empirical support for price stickiness, even though the New Classicals argued that the existence of price stickiness allegedly lacked microeconomic foundations in view of their rational expectations theory (Melmiès 2012: 452).
The New Keynesians proposed various explanations of real world price stickiness, including the following factors:
(1) Menu costsMore empirical work established that businesses themselves viewed the implicit contract, nominal contract, coordination failure, and cost-based pricing factors as the most important in affecting price rigidity (Melmiès 2012: 453; Blinder 1998). Most notably, the New Keynesian menu costs, nonprice competition, and costly information ideas did not receive much support (Melmiès 2010: 453).
(2) Implicit contracts
(3) Nominal contracts
(4) Coordination failure
(5) Cost-based pricing
(6) Constant marginal cost
(7) Non-price competition
(8) Pricing threshold
(9) Link between quality and price. (Melmiès 2012: 453).
Furthermore, the New Keynesian idea is fundamentally one of constrained price stickiness: firms wish to change their prices, but are constrained by factors from doing so (Melmiès 2012: 454).
By contrast, Post Keynesians would say that many firms quite deliberately set prices. Firms act to ensure their survival and grow their business and market share. By looking more at the long term state of demand, the price of many products is often not affected by short term changes in demand. The most important cause of price adjustments are changes in the costs of factor inputs and wages. Thus the pricing policies of firms are quite conscious and deliberate acts of price administration and setting, and this action results in a deliberately-caused price stickiness in the market. A consequence of this is that profit margins are also stable, and such margins are needed for internal financing of investment.
It is important to distinguish between the New Keynesian view of price rigidity and that of Post Keynesianism.
New Keynesians believe that, if only prices were perfectly flexible, then economies would adjust rapidly to full employment equilibrium. Post Keynesians, following Keynes himself, reject the view that perfectly flexible wages, prices and perfect competition would lead to full employment equilibrium. Even if there were perfectly flexible wages and prices, there could still be failures of aggregate demand (Davidson 1992).
In Post Keynesianism, therefore, price rigidity is not the fundamental cause of demand affecting output (Melmiès 2012: 456).
Blinder, A. S. et al. (eds.). 1998. Asking About Prices: A New Approach to Understanding Price Stickiness, Russell Sage Foundation, New York.
Davidson, P. 1992. “Would Keynes be a New Keynesian?,” Eastern Economic Journal 18.4: 449–463.
Melmiès, J. 2010. “New-Keynesians Versus Post-Keynesians on the Theory of Prices,” Journal of Post Keynesian Economics 32.3: 445-466.
Melmiès, J. 2012. “Price Rigidity,” in J. E. King, The Elgar Companion to Post Keynesian Economics (2nd edn.). Edward Elgar, Cheltenham. 452–456.