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A note on price adjustment with menu cost for multi-product firms

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  • Fernando Alvarez

    (University of Chicago)

  • Francesco Lippi

    (University of Sassari, EIEF)

Abstract

We study the stylized problem of a multi-product firm that can revise prices only after paying a fixed “menu” cost. The key assumption, introduced by Lach and Tsiddon (1996, 2007) and Midrigan (2007, 2009), is that once the menu cost is paid the firm can adjust the price of all its products. The firm’s problem is to minimize the deviations of the profits incurred relative to the flexible price case, i.e. the case with no menu cost. We completely characterize the solution of a simple symmetric problem in terms of the structural parameters: the variability of the flexible prices, the curvature of the profit function, the size of the menu cost, and the number of products sold by the firm. We also provide analytical expressions for the frequency of adjustment, the hazard rate of price adjustments, and the distribution of price changes in terms of the structural parameters.

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Bibliographic Info

Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1018.

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Length: 42 pages
Date of creation: 2010
Date of revision: Dec 2010
Handle: RePEc:eie:wpaper:1018

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References

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  1. Fernando E. Alvarez & Francesco Lippi & Luigi Paciello, 2010. "Optimal price setting with observation and menu costs," NBER Working Papers 15852, National Bureau of Economic Research, Inc.
  2. Dutta, Shantanu, et al, 1999. "Menu Costs, Posted Prices, and Multiproduct Retailers," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 31(4), pages 683-703, November.
  3. Raphael S. Schoenle & Saroj Bhattarai, 2011. "Multiproduct Firms and Price-Setting: Theory and Evidence from U.S. Producer Prices," 2011 Meeting Papers, Society for Economic Dynamics 926, Society for Economic Dynamics.
  4. Neiman, Brent, 2010. "Stickiness, synchronization, and passthrough in intrafirm trade prices," Journal of Monetary Economics, Elsevier, Elsevier, vol. 57(3), pages 295-308, April.
  5. Robert Lucas & Mike Golosov, 2004. "Menu Costs and Phillips Curves," 2004 Meeting Papers, Society for Economic Dynamics 144, Society for Economic Dynamics.
  6. Emmanuel Dhyne & Jerzy Konieczny, 2007. "Temporal Distribution of Price Changes: Staggering in the Large and Synchronization in the Small," Working Paper Series, The Rimini Centre for Economic Analysis 01-07, The Rimini Centre for Economic Analysis, revised Jul 2007.
  7. Laurent Baudry & Hervé Le Bihan & Patrick Sevestre & Sylvie Tarrieu, 2007. "What do Thirteen Million Price Records have to Say about Consumer Price Rigidity?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 69(2), pages 139-183, 04.
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Cited by:
  1. Saroj Bhattarai & Raphael Schoenle, 2010. "Multiproduct Firms and Price-Setting: Theory and Evidence from U.S. Producer Prices," Working Papers, Princeton University, Department of Economics, Center for Economic Policy Studies. 1245, Princeton University, Department of Economics, Center for Economic Policy Studies..

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