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Price setting with menu cost for multi-product firms

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  • Fernando Alvarez

    (University of Chicago)

  • Francesco Lippi

    (University of Sassari and EIEF)

Abstract

We model the decisions of a multi-product firm that faces a fixed “menu” cost; once it is paid, the firm can adjust the price of all its products. We characterize analytically the steady state firm’s decisions 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. We provide expressions for the steady state frequency of adjustment, the hazard rate of price adjustments, and the size distribution of price changes, all in terms of the structural parameters. We study analytically the impulse response of aggregate prices and output to a monetary shock. The size of the output response and its duration increase with the number of products, they more than double as the number of products goes from 1 to ten, quickly converging to the ones of Taylor’s staggered price model.

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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 1302.

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Length: 78 pages
Date of creation: 2013
Date of revision: Feb 2013
Handle: RePEc:eie:wpaper:1302

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  1. Martin Eichenbaum & Nir Jaimovich & Sergio Rebelo & Josephine Smith, 2014. "How Frequent Are Small Price Changes?," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(2), pages 137-55, April.
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  5. Alvarez, Fernando E & Lippi, Francesco & Paciello, Luigi, 2010. "Optimal price setting with observation and menu costs," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7861, C.E.P.R. Discussion Papers.
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  7. Raphael S. Schoenle & Saroj Bhattarai, 2011. "Multiproduct Firms and Price-Setting: Theory and Evidence from U.S. Producer Prices," 2011 Meeting Papers 926, Society for Economic Dynamics.
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  9. Fernando Alvarez & Francesco Lippi & Luigi Paciello, 2013. "Monetary Shocks with Observation and menu Costs," EIEF Working Papers Series 1310, Einaudi Institute for Economics and Finance (EIEF), revised May 2013.
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Citations

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Cited by:
  1. Alvarez, Fernando & Dixit, Avinash, 2014. "A real options perspective on the future of the Euro," Journal of Monetary Economics, Elsevier, Elsevier, vol. 61(C), pages 78-109.
  2. Joseph Vavra, 2011. "Inflation Dynamics and Time-Varying Uncertainty: New Evidence and an Ss Interpretation," 2011 Meeting Papers 126, Society for Economic Dynamics.
  3. Joseph Vavra, 2013. "Inflation Dynamics and Time-Varying Volatility: New Evidence and an Ss Interpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 129(1), pages 215-258.
  4. Martin S. Eichenbaum & Nir Jaimovich & Sergio Rebelo & Josephine Smith, 2012. "How Frequent Are Small Price Changes?," NBER Working Papers 17956, National Bureau of Economic Research, Inc.
  5. Emi Nakamura & J�n Steinsson, 2013. "Price Rigidity: Microeconomic Evidence and Macroeconomic Implications," Annual Review of Economics, Annual Reviews, Annual Reviews, vol. 5(1), pages 133-163, 05.
  6. Julio Blanco & Isaac Baley, 2013. "Learning to Price," 2013 Meeting Papers, Society for Economic Dynamics 663, Society for Economic Dynamics.

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