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

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Author Info
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)

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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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Paper provided by National Bank of Belgium in its series Research series with number 200610-11.

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

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

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Find related papers by JEL classification:
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Burstein, Ariel Tomas & Hellwig, Christian, 2007. "Prices and Market Shares in a Menu Cost Model," CEPR Discussion Papers 6504, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Nancy Masschelein, 2007. "Monitoring pro-cyclicality under the capital requirements directive : preliminary concepts for developing a framework," Documents series 200711-22, National Bank of Belgium. [Downloadable!]
  3. Frédéric Lagneaux, 2008. "Economic Importance of Belgian Transport Logistics," Documents series 200801-01, National Bank of Belgium. [Downloadable!]
  4. Annick Bruggeman, 2007. "Can Excess Liquidity Signal an Asset Price Boom?," Research series 200708-08, National Bank of Belgium. [Downloadable!]
  5. Philippe Jeanfils, 2008. "Imperfect exchange rate pass-through : the role of distribution services and variable demand elasticity," Research series 200808-19, National Bank of Belgium. [Downloadable!]
  6. Carine Swartenbroekx, 2007. "The gas chain : influence of its specificities on the liberalisation process," Documents series 200711-24, National Bank of Belgium. [Downloadable!]
  7. Iñaki Aguirre, 2008. "Output and misallocation effects in monopolistic third-degree price discrimination," Economics Bulletin, Economics Bulletin, vol. 4(11), pages 1-11. [Downloadable!]
  8. Christopher Gust & Sylvain Leduc & Nathan Sheets, 2008. "The adjustment of global external balances: does partial exchange rate pass-through to trade prices matter?," Working Paper Series 2008-16, Federal Reserve Bank of San Francisco. [Downloadable!]
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  9. Maarten Dossche, 2009. "Understanding inflation dynamics : Where do we stand ?," Research series 200906-11, National Bank of Belgium. [Downloadable!]
  10. François Coppens & Fernando Gonzáles & Gerhard Winkler, 2007. "The performance of credit rating systems in the assessment of collateral used in Eurosystem monetary policy operations," Research series 200710-12, National Bank of Belgium. [Downloadable!]
    Other versions:
  11. Andrew T. Levin & J. David López-Salido & Edward Nelson & Tack Yun, 2008. "Macroeconometric equivalence, microeconomic dissonance, and the design of monetary policy," Working Papers 2008-035, Federal Reserve Bank of St. Louis. [Downloadable!]
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