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Do Menu Costs Make Prices Sticky?

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  • Thomas A. Eife

    ()
    (University of Heidelberg, Department of Economics)

Abstract

This paper studies whether menu costs are large enough to explain why firms are so reluctant to change their prices. Without actually estimating menu costs, we can infer their relevance for firms' price setting decisions from observed pricing behavior around a currency changeover. At a currency changeover, firms have to reprint their price tags (menus) independently of whether or not they want to change prices. And if this is costly, firms' price setting behavior is altered in the months around the changeover. Using data from the Euro-changeover, the paper estimates that menu costs can explain a stickiness of around 30 days which is considerably less than the 7 to 24-month stickiness we observe in retailing and in the service sector. The reluctance of firms to adjust prices more frequently appears to be caused by factors other than menu costs.

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File URL: http://www.uni-heidelberg.de/md/awi/forschung/dp477.pdf
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Bibliographic Info

Paper provided by University of Heidelberg, Department of Economics in its series Working Papers with number 0477.

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Length: 30 pages
Date of creation: Oct 2008
Date of revision: Oct 2008
Handle: RePEc:awi:wpaper:0477

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Keywords: menu costs; price stickiness;

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References

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  1. Dhyne, Emmanuel & Fuss, Catherine & Pesaran, M. Hashem & Sevestre, Patrick, 2011. "Lumpy Price Adjustments: A Microeconometric Analysis," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 29(4), pages 529-540.
  2. Nicole Jonker & Carsten Folkertsma & Harry Blijenberg, 2004. "An Emprical Analysis of Price Setting Behaviour in the Netherlands in the Period 1998-2003 Using Micro Data," DNB Working Papers, Netherlands Central Bank, Research Department 019, Netherlands Central Bank, Research Department.
  3. Pinelopi Koujianou Goldberg & Rebecca Hellerstein, 2006. "A Framework for Identifying the Sources of Local-Currency Price Stability with an Empirical Application," 2006 Meeting Papers, Society for Economic Dynamics 625, Society for Economic Dynamics.
  4. Levy, Daniel, et al, 1997. "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(3), pages 791-825, August.
  5. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(4), pages 1415-1464, November.
  6. Álvarez, Luis J. & Dhyne, Emmanuel & Hoeberichts, Marco M. & Kwapil, Claudia & Le Bihan, Hervé & Lünnemann, Patrick & Martins, Fernando & Sabbatini, Roberto & Stahl, Harald & Vermeulen, Philip & Vi, 2005. "Sticky prices in the euro area: a summary of new micro evidence," Working Paper Series, European Central Bank 0563, European Central Bank.
  7. Pinelopi K. Goldberg & Rebecca Hellerstein, 2007. "A Structural Approach to Identifying the Sources of Local-Currency Price Stability," NBER Working Papers 13183, National Bureau of Economic Research, Inc.
  8. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(5), pages 947-985, October.
  9. Baudry, Laurent & Le Bihan, Hervé & Sevestre, Patrick & Tarrieu, Sylvie, 2004. "Price rigidity. Evidence from the French CPI micro-data," Working Paper Series, European Central Bank 0384, European Central Bank.
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  11. Alan S. Blinder, 1991. "Why are Prices Sticky? Preliminary Results from an Interview Study," NBER Working Papers 3646, National Bureau of Economic Research, Inc.
  12. Bart Hobijn & Federico Ravenna & Andrea Tambalotti, 2004. "Menu costs at work: restaurant prices and the introduction of the euro," Staff Reports, Federal Reserve Bank of New York 195, Federal Reserve Bank of New York.
  13. Hoffmann, Johannes & Kurz-Kim, Jeong-Ryeol, 2006. "Consumer price adjustment under the microscope: Germany in a period of low inflation," Working Paper Series, European Central Bank 0652, European Central Bank.
  14. Oleksiy Kryvtsov & Peter J. Klenow, 2004. "State-Dependent or Time-Dependent Pricing: Does It Matter For Recent U.S. Inflation?," Computing in Economics and Finance 2004, Society for Computational Economics 277, Society for Computational Economics.
  15. Fengler, Matthias R. & Winter, Joachim, 2007. "Price variability and price dispersion in a stable monetary environment: Evidence from German retail markets," Munich Reprints in Economics, University of Munich, Department of Economics 20338, University of Munich, Department of Economics.
  16. Shantanu Dutta & Mark Bergen & Daniel Levy & Robert Venable, 2005. "Menu Costs, Posted Prices, and Multiproduct Retailers," Macroeconomics, EconWPA 0505007, EconWPA.
  17. Hall, Simon & Walsh, Mark & Yates, Anthony, 2000. "Are UK Companies' Prices Sticky?," Oxford Economic Papers, Oxford University Press, vol. 52(3), pages 425-46, July.
  18. Andrew C. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," NBER Working Papers 2311, National Bureau of Economic Research, Inc.
  19. Danziger, Leif, 1983. "Price Adjustments with Stochastic Inflation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 699-707, October.
  20. Sheshinski, Eytan & Weiss, Yoram, 1983. "Optimum Pricing Policy under Stochastic Inflation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 50(3), pages 513-29, July.
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Cited by:
  1. Thomas A. Eife, 2006. "Price setting behaviour and price setting regulations at the euro changeover," Bank of Estonia Working Papers, Bank of Estonia 2006-06, Bank of Estonia, revised 12 Oct 2006.

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