The Timing of Price Changes and the Role of Heterogeneity
AbstractWhile price-setting models usually suggest constant or increasing hazard functions for price changes, empirical studies often find decreasing hazards, possibly due to misspecified or neglected heterogeneity. This paper attempts to disentangle the downward bias into various sources: observed and unobserved heterogeneity which can be either constant or time-varying. Based on micro data from the Swiss CPI, the paper finds that in order to resolve the downward bias of the hazard function for price changes, we have to (i) control for time-varying heterogeneity in addition to cross-sectional factors and (ii) exclude temporary price changes such as sales prices from the data set. Among the time-varying factors affecting the probability of price changes, various proxies of firms' marginal costs seem to be key. The empirical findings presented in this paper are consistent with recent menu cost models which stress the role of time-varying heterogeneity and temporary price cuts for price setting.
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Bibliographic InfoPaper provided by Swiss National Bank in its series Working Papers with number 2010-02.
Length: 69 pages
Date of creation: 2010
Date of revision:
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More information through EDIRC
price setting; hazard function; downward bias; heterogeneity; sales prices; state-dependent pricing;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
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