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Prices and Market Shares in a Menu Cost Model

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  • Ariel Burstein
  • Christian Hellwig

Abstract

Pricing complementarities play a key role in determining the propagation of monetary disturbances in sticky price models. We propose a procedure to infer the degree of firm-level pricing complementarities in the context of a menu cost model of price adjustment using data on prices and market shares at the level of individual varieties. We then apply this procedure by calibrating our model (in which pricing complementarities are based on decreasing returns to scale at the variety level) using scanner data from a large grocery chain. Our data is consistent with moderately strong levels of firm-level pricing complementarities, but they appear too weak to generate much larger aggregate real effects from nominal shocks than a model without these complementarities.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13455.

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Date of creation: Sep 2007
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Handle: RePEc:nbr:nberwo:13455

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