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Menu Costs and Dynamic Duopoly

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  • Kazuko Kano

Abstract

Examining a state-dependent pricing model in the presence of menu costs and dynamic duopolistic interactions, this paper claims that the assumption regarding market structure is crucial for iden- tifying the menu costs for price changes. Prices in a dynamic duopolistic market can be more rigid than those in more competitive markets, such as a monopolistic-competition market. Therefore, the estimates of menu costs under monopolistic competition are potentially biased upward due to the price rigidity from strategic interactions between dynamic duopolistic firms. By developing and estimating a dynamic discrete-choice model with duopoly to correct for this potential bias, this paper provides empirical evidence that dynamic strategic interactions, as well as menu costs, play an important role in explaining the observed degree of price rigidity in weekly retail prices.

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File URL: http://gcoe.ier.hit-u.ac.jp/research/discussion/2008/pdf/gd12-263.pdf
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Bibliographic Info

Paper provided by Institute of Economic Research, Hitotsubashi University in its series Global COE Hi-Stat Discussion Paper Series with number gd12-263.

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Date of creation: Dec 2012
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Handle: RePEc:hst:ghsdps:gd12-263

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Keywords: Menu Costs; Dynamic Discrete Choice Game; Retail Price;

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References

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Cited by:
  1. Brent Neiman, 2009. "A State-Dependent Model of Intermediate Goods Pricing," Working Papers 2010-006, Becker Friedman Institute for Research In Economics.

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