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Menu costs and asymmetric price adjustment

Author

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  • Ellingsen, Tore
  • Friberg, Richard
  • Hassler, John

Abstract

We study optimal price setting by a monopolist in an infinite horizon model with stochastic costs, moderate inflation, and costly price adjustment. For realistic parameters, chosen to generate observed frequencies of price changes, the model can account for several aggregate regularities. In particular, price reductions are larger but less frequent than price increases, and prices respond considerably faster to cost increases than to cost decreases. The latter asymmetry is more pronounced when input prices are less volatile, as documented by Pelzman (2000).

Suggested Citation

  • Ellingsen, Tore & Friberg, Richard & Hassler, John, 2026. "Menu costs and asymmetric price adjustment," International Journal of Industrial Organization, Elsevier, vol. 105(C).
    • Handle: RePEc:eee:indorg:v:105:y:2026:i:c:s0167718726000123
    DOI: 10.1016/j.ijindorg.2026.103259
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    2. Rather, Sartaj Rasool & Durai, S. Raja Sethu & Ramachandran, M., 2015. "Asymmetric price adjustment – evidence for India," The Journal of Economic Asymmetries, Elsevier, vol. 12(2), pages 73-79.
    3. Adam Reiff & Peter Karadi, 2011. "Large Shocks in Menu Cost Models," 2011 Meeting Papers 884, Society for Economic Dynamics.
    4. Bagnai, Alberto & Mongeau Ospina, Christian Alexander, 2018. "Asymmetries, outliers and structural stability in the US gasoline market," Energy Economics, Elsevier, vol. 69(C), pages 250-260.
    5. Gunwant, Darshita Fulara & Rather, Sartaj Rasool, 2021. "Transmission of world price shocks - Evidence from GCC countries," The Journal of Economic Asymmetries, Elsevier, vol. 24(C).
    6. Rebelo, Sergio & Santana, Miguel & Teles, Pedro, 2025. "Behavioral sticky prices," Journal of Monetary Economics, Elsevier, vol. 155(S).
    7. James Yetman, 2009. "Hong Kong Consumer Prices are Flexible," Working Papers 052009, Hong Kong Institute for Monetary Research.
    8. Levy, Daniel & Snir, Avichai & Gotler, Alex & Chen, Haipeng (Allan), 2020. "Not all price endings are created equal: Price points and asymmetric price rigidity," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, issue forthcomi.
    9. Kenichi MATSUMOTO & Azusa OKAGAWA, 2010. "Analysis of Economic and Environmental Impacts of CO2 Abatement in Japan Applying a CGE Model with Knowledge Investment," EcoMod2010 259600115, EcoMod.
    10. Bagnai, Alberto & Mongeau Ospina, Christian Alexander, 2016. "“Asymmetric asymmetries” in Eurozone markets gasoline pricing," The Journal of Economic Asymmetries, Elsevier, vol. 13(C), pages 89-99.
    11. Péter Karádi & Ádám Reiff, 2010. "Inflation asymmetry, menu costs and aggregation bias – A further case for state dependent pricing," MNB Working Papers 2010/3, Magyar Nemzeti Bank (Central Bank of Hungary).
    12. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(4), pages 1415-1464.
    13. Bo E. Honoré & Daniel Kaufmann & Sarah Lein, 2012. "Asymmetries in Price‐Setting Behavior: New Microeconometric Evidence from Switzerland," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(s2), pages 211-236, December.
    14. Peter Karadi & Adam Reiff, 2019. "Menu Costs, Aggregate Fluctuations, and Large Shocks," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(3), pages 111-146, July.
    15. Ralph-C Bayer & Changxia Ke, 2010. "Rockets and Feathers in the Laboratory," Adelaide Economics Working Papers 2010-20, Adelaide University, School of Economics.

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    Keywords

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    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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