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Menu Costs, Sticky Prices, and Strategic Firm Interaction

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  • Dan Bernhardt

Abstract

Sticky nominal prices represent a cornerstone of many macroeconomic models. The effects of price adjustment on strategic firm interaction and the resulting price series implications are less established. This paper develops a spatial economy to analyze these interactions. In the two period environment, each firm, facing menu costs, must choose (whether to adjust) the price of its spatially identified good in the Bayesian Nash competition. These finding accord with empirical work which find that markets with more heterogeneous goods which are less competitive (e.g. labour) have stickier prices than others (e.g. wheat). Firms tend to adjust prices in concert and be more responsive towards shocks which lead to price increases than decreases, as has been documented empirically. The magnitude of menu costs affect the ability of firms to collude, so expected profits may increase with menu costs.

Suggested Citation

  • Dan Bernhardt, 1987. "Menu Costs, Sticky Prices, and Strategic Firm Interaction," Working Paper 688, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:688
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    Keywords

    spatial competition; heterogeneity;

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