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

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Author Info
M. DOSSCHE ()
F. HEYLEN ()
D. VAN DEN POEL ()

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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.

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Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 06/429.

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Length: 42 pages
Date of creation: Dec 2006
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Handle: RePEc:rug:rugwps:06/429

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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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References listed on IDEAS
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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. Annick Bruggeman, 2007. "Can Excess Liquidity Signal an Asset Price Boom?," Research series 200708-08, National Bank of Belgium. [Downloadable!]
  4. Iñaki Aguirre, 2008. "Output and misallocation effects in monopolistic third-degree price discrimination," Economics Bulletin, Economics Bulletin, vol. 4(11), pages 1-11. [Downloadable!]
  5. 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!]
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  6. Frédéric Lagneaux, 2008. "Economic Importance of Belgian Transport Logistics," Documents series 200801-01, National Bank of Belgium. [Downloadable!]
  7. Carine Swartenbroekx, 2007. "The gas chain : influence of its specificities on the liberalisation process," Documents series 200711-24, National Bank of Belgium. [Downloadable!]
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