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Multiproduct firms and price-setting: theory and evidence from U.S. producer prices

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  • Saroj Bhattarai
  • Raphael Schoenle

Abstract

In this paper, we establish three new facts about price-setting by multiproduct firms and contribute a model that can explain our findings. Our findings have important implications for real effects of nominal shocks and provide guidance for how to model pricing decisions of firms. On the empirical side, using micro-data on U.S. producer prices, we first show that firms selling more goods adjust their prices more frequently but on average by smaller amounts. Moreover, the higher the number of goods, the lower is the fraction of positive price changes and the more dispersed the distribution of price changes. Second, we document substantial synchronization of price changes within firms across products and show that synchronization plays a dominant role in explaining pricing dynamics. Third, we find that within-firm synchronization of price changes increases as the number of goods increases. On the theoretical side, we present a state-dependent pricing model where multiproduct firms face both aggregate and idiosyncratic shocks. When we allow for firm-specific menu costs and trend inflation, the model matches the empirical findings.

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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 73.

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Date of creation: 2011
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Handle: RePEc:fip:feddgw:73

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Keywords: Price levels ; Productivity;

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  1. V. Bhaskar, 2002. "On Endogenously Staggered Prices," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 97-116.
  2. Pinelopi Goldberg & Rebecca Hellerstein, 2009. "How Rigid Are Producer Prices?," Working Papers 1184, Princeton University, Department of Economics, Center for Economic Policy Studies..
  3. Saul Lach & Daniel Tsiddon, 1994. "Staggering and Synchronization in Price-Setting: Evidence from Multipro-duct Firms," NBER Working Papers 4759, National Bureau of Economic Research, Inc.
  4. Peter J. Klenow & Oleksiy Kryvtsov, 2007. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," Discussion Papers 07-007, Stanford Institute for Economic Policy Research.
  5. David Cornille & Maarten Dossche, 2008. "Some Evidence on the Adjustment of Producer Prices," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(3), pages 489-518, 09.
  6. Emmanuel Dhyne & Jerzy Konieczny, 2007. "Temporal Distribution of Price Changes : Staggering in the Large and Synchronization in the Small," Working Paper Research 116, National Bank of Belgium.
  7. Fernando Alvarez & Francesco Lippi, 2010. "A note on price adjustment with menu cost for multi-product firms," EIEF Working Papers Series 1018, Einaudi Institute for Economics and Finance (EIEF), revised Dec 2010.
  8. Petia Topalova & Nina Pavcnik & Amit Khandelwal & Penny Goldberg, 2009. "Multi-product Firms and Product Turnover in the Developing World: Evidence from India," 2009 Meeting Papers 176, Society for Economic Dynamics.
  9. Carvalho Carlos, 2006. "Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(3), pages 1-58, December.
  10. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
  11. Klenow, Peter J. & Malin, Benjamin A., 2010. "Microeconomic Evidence on Price-Setting," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 6, pages 231-284 Elsevier.
  12. Robert Lucas & Mike Golosov, 2004. "Menu Costs and Phillips Curves," 2004 Meeting Papers 144, Society for Economic Dynamics.
  13. Mark Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2004. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," Macroeconomics 0402020, EconWPA.
  14. Neiman, Brent, 2010. "Stickiness, synchronization, and passthrough in intrafirm trade prices," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 295-308, April.
  15. Sheshinski, Eytan & Weiss, Yoram, 1992. "Staggered and Synchronized Price Policies under Inflation: The Multiproduct Monopoly Case," Review of Economic Studies, Wiley Blackwell, vol. 59(2), pages 331-59, April.
  16. Etienne Gagnon, 2007. "Price setting during low and high inflation: evidence from Mexico," International Finance Discussion Papers 896, Board of Governors of the Federal Reserve System (U.S.).
  17. Carlos Carvalho, 2005. "Heterogeneity in Price Setting and the Real Effects of Monetary Shocks," Macroeconomics 0509017, EconWPA, revised 12 Sep 2005.
  18. Fisher, Timothy C. G. & Konieczny, Jerzy D., 2000. "Synchronization of price changes by multiproduct firms: evidence from Canadian newspaper prices," Economics Letters, Elsevier, vol. 68(3), pages 271-277, September.
  19. Gita Gopinath & Roberto Rigobon, 2008. "Sticky Borders," The Quarterly Journal of Economics, MIT Press, vol. 123(2), pages 531-575, 05.
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  1. Price points, good diversity and price rigidity
    by Economic Logician in Economic Logic on 2011-02-17 15:17:00
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