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Menu costs and dynamic duopoly

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Listed author(s):
  • 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.

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File URL: http://www.sciencedirect.com/science/article/pii/S0167718712001178
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Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 31 (2013)
Issue (Month): 1 ()
Pages: 102-118

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Handle: RePEc:eee:indorg:v:31:y:2013:i:1:p:102-118
DOI: 10.1016/j.ijindorg.2012.11.002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

Keywords: Menu costs; Dynamic discrete choice game; Retail price;

Other versions of this item:

Find related papers by 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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Cited by:

  1. Brent, Neiman, 2011. "A state-dependent model of intermediate goods pricing," Journal of International Economics, Elsevier, vol. 85(1), pages 1-13, September.
  2. Aguirregabiria, Victor & Slade, Margaret E., 2017. "Empirical Models of Firms and Industries," Microeconomics.ca working papers margaret_e._slade-2017-4, Vancouver School of Economics, revised 27 Apr 2017.

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