Proceedings of 28th International Business Research Conference
8 - 9 September 2014, Novotel Barcelona City Hotel, Barcelona, Spain, ISBN: 978-1-922069-60-3
Sticky Cost Behavior: Quantity Based Approach
Jinbae Kim1, Sejoong Lee2 and Changseop Rhee3
Prior researches have documented sticky behavior of costs, i.e. costs increase more
when activity rises than costs decrease when activity falls. Most of these studies
measure increase or decrease of activity in terms of sales. Because sales figures are
affected not only by activity changes but also by price changes, the results of prior
studies may be compromised by the effect of price changes. By excluding the price
effect, this study investigates whether costs are really sticky in terms of activity or
quantity, and shows how much the real cost behavior differs from the nominal cost
behavior which includes the price effect. While some studies try to exclude the effect
of prices by using general price index like CPI, such approach works only when cost
side price changes are equal to sales side price changes. In this study, we use the
input-output table used in economics studies to isolate the price effects separately
from sales side and cost side, and measure the real cost behavior. (We call it “quantity
based approach.”) Our analysis shows that while costs are still sticky after controlling
the price effect, the price effect significantly affects the degree of nominal stickiness,
especially when the gap between the cost side price change rates are considerably
different from the sales side price change rates. This result raises a possibility that the
results of the previous studies may have been affected by not excluding the price
effect.
JEL Classification: L2, M21, M41
Keywords: cost stickiness, asymmetric cost behavior, input-output table
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Jinbae Kim is a professor from Korea University Business School, Email:jinbae@korea.ac.kr
Sejoong Lee is a Ph.D student from School of Business, The University of Hong Kong
Changseop Rhee is a Ph.D student from Korea University Business School