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The kinked demand curve and price rigidity : evidence from scanner data

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  • Maarten Dossche

    ()
    (National Bank of Belgium, Research Department
    Ghent University, Study Hive for Economic Research and Public Policy Analysis (SHERPPA))

  • Freddy Heylen

    ()
    (Ghent University, Study Hive for Economic Research and Public Policy Analysis (SHERPPA))

  • Dirk Van den Poel

    ()
    (Marketing Department, Ghent University)

Abstract

This paper uses scanner data from a large euro area retailer. We extend Deaton and Muellbauer's Almost Ideal Demand System to estimate the price elasticity and curvature of demand for a wide range of products. Our results support the introduction of a kinked (concave) demand curve in general equilibrium macro models. We find that the price elasticity of demand is on average higher for price increases than for price decreases. However, the degree of curvature in demand is much lower than is currently imposed. Moreover, for a significant fraction of products we observe a convex demand curve. We find no correlation between the estimated price elasticity/curvature and the observed size or frequency of price adjustment in our data

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File URL: http://www.nbb.be/doc/oc/repec/reswpp/WP99.pdf
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Bibliographic Info

Paper provided by National Bank of Belgium in its series Working Paper Research with number 99.

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Length: 47 pages
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:nbb:reswpp:200610-11

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Keywords: price setting; real rigidity; kinked demand curve; behavioral AIDS;

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Cited by:
  1. Anna Watson, 2010. "The Impact of Trade Integration and Competition on Real and Nominal Price Rigidities: Insights from a New-Keynesian DSGE Model," DEGIT Conference Papers c015_061, DEGIT, Dynamics, Economic Growth, and International Trade.
  2. Christian Hellwig & Ariel Burstein, 2007. "Prices and Market Shares in a Menu Cost Model," 2007 Meeting Papers 327, Society for Economic Dynamics.
  3. Luca Guerrieri & Christopher Gust & David López-Salido, 2008. "International competition and inflation: a New Keynesian perspective," International Finance Discussion Papers 918, Board of Governors of the Federal Reserve System (U.S.).
  4. Steffen Ahrens & Inske Pirschel & Dennis Snower, 2014. "A Theory of Price Adjustment under Loss Aversion," Kiel Working Papers 1915, Kiel Institute for the World Economy.
  5. Iñaki Aguirre, 2008. "Output and misallocation effects in monopolistic third-degree price discrimination," Economics Bulletin, AccessEcon, vol. 4(11), pages 1-11.
  6. Dirk Van den Poel & Benjamin Verhelst, 2011. "Price Rigidity in Europe and the US: A Comparative Analysis Using Scanner Data," 2011 Meeting Papers 524, Society for Economic Dynamics.
  7. Michael K. Johnston, 2009. "Real and Nominal Frictions within the Firm: How Lumpy Investment Matters for Price Adjustment," Working Papers 09-36, Bank of Canada.
  8. B. Verhelst & D. Van Den Poel, 2012. "Implicit Contracts and Price Stickiness: Evidence from Customer-Level Scanner Data," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/776, Ghent University, Faculty of Economics and Business Administration.
  9. B. Verhelst & D. Van Den Poel, 2012. "Deep Habits in Consumption: A Spatial Panel Analysis Using Scanner Data," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/823, Ghent University, Faculty of Economics and Business Administration.

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