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What is Staggered Contracting, Recession Style

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The concept of staggered contracting revolves around one primary topic: price. At a glance, staggered contracting seems like something only found in a parallel, Utopian dimension: prices don’t wildly fluctuate. In fact, under the definition of staggered contracting, prices don’t move at all in either direction.

This is certainly a relief in some ways, as prices are not going to increase. On the reverse side, prices are also not going to decrease — something that can be problematic in a recession economy. Overall, this is a model in which entities agree to keep a price steady for a fixed length of time. The reality of steady prices in a recession makes staggered contracting a clear win-win — but is it really?

On the surface, staggered contracting does look like a solid hero in a recession economy — prices would remain fixed until the contracted agreement expires. Once the agreed time period passes, companies are again free to alter prices as they see fit. However, looking closer at the concept in a more real world setting brings up some concerns.

First, staggered contracting comes to an end eventually. During the price “freeze”, goods and services remain at a fixed price, even if demand or supply change. While prices offered to the public remain static, there is no guarantee that manufacturing costs will also stay the same. This means that once the contracted period is over, the odds are good that prices will indeed increase. After all, if manufacturing costs increase, those costs have to be passed on to someone. Very few businesses are going to absorb the higher costs themselves.

Next, the aftereffects of a price freeze are also felt by employees. From a personal finance point of view, a company paying higher manufacturing costs without being able to pass on the cost to the consumer means that the focus must now be on corporate overhead. Payroll is one of the biggest expenses of an organization, making it one of the first things that get analyzed when the economy begins to slow down. Consumer confidence takes a hit when corporations begin utilizing pay-cuts and and hiring freezes. This changes the unemployment landscape greatly.

It goes without saying that this also has an effect on wages for those that are not laid off from work or already suffering from pay-cuts. Salary increases are almost always out of the question, which forces employees to think long and hard about what they spend money on. It can create a cycle — an economic cytokine storm where the strong reaction to stagnant and even falling wages is enough to severely weaken demand. Like its medical counterpart, failure to treat the symptoms can be fatal very quickly.

Does this mean that staggered contracting can’t be the superhero our recessionary hearts crave? Not exactly — worst-case scenarios aside, staggered contracting can actually be a benefit for both organizations and consumers as well. In the long run, the action of holding prices can encourage consumer loyalty to one brand or another, spurring renewed growth in stagnant or dying brands.

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