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The (Q,S,s) Pricing Rule: A Quantitative Analysis

Author

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  • Kenneth Burdett

    (Department of Economics, University of Pennsylvania)

  • Guido Menzio

    (Department of Economics, University of Pennsylvania)

Abstract

Are nominal prices sticky because menu costs prevent sellers from continuously adjusting their prices to keep up with inflation or because search frictions make sellers indifferent to any real price over some non-degenerate interval? The paper answers the question by developing and calibrating a model in which both search frictions and menu costs may generate price stickiness and sellers are subject to idiosyncratic shocks. The equilibrium of the calibrated model is such that sellers follow a (Q,S,s) pricing rule: each seller lets inflation erode the effective real value of the nominal prices until it reaches some point s and then pays the menu cost and sets a new nominal price with an effective real value drawn from a distribution with support [S,Q], with s

Suggested Citation

  • Kenneth Burdett & Guido Menzio, 2017. "The (Q,S,s) Pricing Rule: A Quantitative Analysis," PIER Working Paper Archive 17-018, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 25 Sep 2017.
    • Handle: RePEc:pen:papers:17-018
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    Cited by:

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    3. Chahrour, Ryan & Stevens, Luminita, 2020. "Price dispersion and the border effect," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 135-146.

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    More about this item

    Keywords

    Search frictions; Menu costs; Sticky prices;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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