Sticky-Down

What Is Sticky-Down?

Sticky-down refers to the tendency of the price of a good to move up easily, although it won’t easily move down. It is related to the term price stickiness, which refers to the resistance of a price—or set of prices—to change. Sticky-down prices may be due to imperfect information, market distortions, or decisions to maximize profit in the short term.

For consumers, if the price of certain good exhibits sticky-down characteristics, it may generate anger and resentment because they may perceive it as an attempt to gouge consumers.

How Sticky-Down Works

Sticky-down has often been used to refer to the price of oil. Consumers acutely feel sticky-down market effects for the goods and products they cannot do without, and where price volatility can be exploited. In the case of gasoline, consumers are not likely to return from the pump without filling their vehicles just because the price of fuel is a few cents higher than it would be if it were not for sticky-down pricing.

Historically, policy decisions in the U.S. during certain periods of time have resulted in persistently higher prices for gasoline, diesel, and other crude-based products. This was especially the case in the late 1970s when the U.S. faced the 1979 energy crisis. At this time, crude prices more than doubled—from December 1978 to June 1980. There were very few, if any, significant moves to the downside.

The news media at the time pointed to the Iranian Revolution as the underlying reason for sticky-down gas prices; this was partially true. However, the price increase also had much to do with fiscal policy, including the decision by U.S. regulators to restrict the supply of gasoline in the early days of the crisis in order to build inventories.

Sticky-down also can relate to situations when gasoline and other energy commodities are in an uptrend and are slow to react to a decline in the underlying price of crude. For example, say crude oil is in a strong uptrend, and it rises beyond $100 per barrel. Pump prices are generally expected to move roughly in line with the rising price of oil, or sometimes even faster. However, say the price of crude suddenly falls overnight by $10 a barrel, or 10%, due to added supply in the Middle East. Gasoline futures may fall as a result. However, the price of gasoline at the local station may not change, as owners of the station still are finding it hard to secure supply at the lower price. Or, perhaps, the station owner simply wants to move slowly in reducing prices to maximize profit. In this situation, gasoline prices at the local level may be said to be sticky-down.

Sticky-down also can apply to soft commodities. For instance, the price of soybean oil will be in a sticky-down market if its price is slow to react to the falling price of soybeans.