Discrete Devaluation as a Signal to Price Setters: Suggested Evidence from Greece (1984)
The origin of this paper can be traced back to early February 1983, following my visit to a small shoe repair shop in a suburb of Athens. The owner of the shop had angrily protested the decision of the firm that supplied him shoe polish to issue a new price list, which effectively raised the prices of almost all of its main products by 20 to 34 percent. His anger was focused not so much on the extent of the price change but on the fact that, contrary to his expectations, the new price list was issued so soon after the last list in October. He maintained that this was a clear violation of the client-supplier relationship, since in the past the implicit price contract set between them left prices unchanged for a period of six to nine months. The justification provided by the firm for this “breach” of contract was the “unprecedented”
devaluation of the drachma during the preceding month. To this the shoemaker replied that the price-surveillance department of the Ministry of Commerce should intervene because the polish firm used only domestically produced goods and thus had used the pretext of the devaluation to raise profits. In Okun’s terms, “customers appear willing to accept as fair an increase in price based on a permanent increase in
cost” (Okun 1975). To the Athenian shoemaker the January devaluation did not entail a permanent increase in cost to the shoe polish firm. This attitude was obviously not shared by the firm itself.