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Menu costs and dynamic duopoly

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  • Kano, Kazuko

Abstract

Examining a state-dependent pricing model in the presence of menu costs and dynamic duopolistic interactions, this paper claims that the assumption regarding market structure is crucial for identifying the menu costs for price changes. Prices in a dynamic duopolistic market can be more rigid than those in more competitive markets, such as a monopolistic-competition market. Therefore, the estimates of menu costs under monopolistic competition are potentially biased upward due to the price rigidity from strategic interactions between dynamic duopolistic firms. By developing and estimating a dynamic discrete-choice model with duopoly to correct for this potential bias, this paper provides empirical evidence that dynamic strategic interactions, as well as menu costs, play an important role in explaining the observed degree of price rigidity in weekly retail prices.

Suggested Citation

  • Kano, Kazuko, 2013. "Menu costs and dynamic duopoly," International Journal of Industrial Organization, Elsevier, vol. 31(1), pages 102-118.
    • Handle: RePEc:eee:indorg:v:31:y:2013:i:1:p:102-118
    DOI: 10.1016/j.ijindorg.2012.11.002
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    Cited by:

    1. repec:cje:issued:v:50:y:2017:i:5:p:1445-1488 is not listed on IDEAS
    2. Brent, Neiman, 2011. "A state-dependent model of intermediate goods pricing," Journal of International Economics, Elsevier, vol. 85(1), pages 1-13, September.
    3. Victor Aguirregabiria & Margaret Slade, 2017. "Empirical models of firms and industries," Canadian Journal of Economics, Canadian Economics Association, vol. 50(5), pages 1445-1488, December.
    4. Simon Mongey, 2017. "Market Structure and Monetary Non-Neutrality," 2017 Meeting Papers 184, Society for Economic Dynamics.
    5. repec:eee:jomega:v:75:y:2018:i:c:p:13-26 is not listed on IDEAS

    More about this item

    Keywords

    Menu costs; Dynamic discrete choice game; Retail price;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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