Good morning,

Like a lot of people, I still experience a lot of sticker shock at the grocery store. Yes, I know: inflation has cooled dramatically since a global pandemic, the war in Ukraine, and bird flu all pushed prices up. Yet I maintain that the price on a humble box of cereal in my neighborhood should never start with a 6.

A recent outrage-fueled trip got me thinking about the concept of “rockets and feathers” in economics. If you’re not familiar with it, here goes: prices tend to rise quickly (like rockets) in response to increased production costs but fall slowly (like feathers) when those same costs come down.

This week, we’ll discuss a study that draws from the world of behavioral economics to help explain this long-standing puzzle. Plus: the three questions you should ask yourself whenever you’re wondering whether to stay at your job or abandon ship.

Rockets and feathers

Daniel Kahneman’s book Thinking Fast and Slow popularized the idea that we make decisions using one of two systems: either we run on autopilot and make choices based on past decisions that have been working well enough (system 1), or we think more deeply about our choices, which is mentally taxing but likely gets us to a better decision (system 2).

In a recent working paper, Kellogg finance professor Sergio Rebelo and his colleagues study how firms would behave if consumers made choices according to the dual system. They find that the resulting model provides a natural explanation for the rockets-and-feathers phenomenon.

The upshot? When production costs rise, all firms raise prices to keep their margins. But when production costs decrease, companies with solid sales have an incentive to keep prices constant, given that price changes could jolt customers out of autopilot and encourage them to turn on system 2 and potentially switch brands. Voila! Rockets and feathers.

The researchers’ model also helps explain some other odd pricing behaviors.

Take shrinkflation, for example. This happens when companies keep the price of a product stable but reduce its size. They’re willing to incur the cost of changing their packaging to avoid changing the sticker price. “It’s truly bizarre,” Rebelo says, until you think of it as a way of preventing consumers from turning on system 2.

You can read more about this research in Kellogg Insight.

3 questions

It’s a question Kellogg’s Harry Kraemer, a clinical professor of strategy and former CEO of Baxter International, gets all the time: “How do I decide whether to stay in my current position or seek an opportunity in another organization?”

And it turns out, he doesn’t have a readymade answer to something this specific and personal. But he does recommend that everyone develop their own criteria for staying vs. leaving, and (better yet!) he is willing to share his own criteria, which he developed decades ago and still uses today.

1) If I stay in this specific position or another position in the same organization, will I have an opportunity to learn and grow?

2) Am I adding value to the organization and making a real difference?

3) Am I having fun?

You can read more on his blog, at HarryKraemer.org.

Jessica Love, editor in chief
Kellogg Insight