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The Kinked Demand Curve and Price Rigidity : Evidence from Scanner Data

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  • M. DOSSCHE
  • F. HEYLEN
  • D. VAN DEN POEL

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.

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  • M. Dossche & F. Heylen & D. Van Den Poel, 2006. "The Kinked Demand Curve and Price Rigidity : Evidence from Scanner Data," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 06/429, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:06/429
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    More about this item

    Keywords

    price setting; real rigidity; kinked demand curve; behavioral AIDS;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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