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The (Q,S,s) Pricing Rule

Author

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  • Kenneth Burdett
  • Guido Menzio

Abstract

We introduce menu costs in the search-theoretic model of imperfect competition of Burdett and Judd. When menu costs are not too large, the equilibrium is such that sellers follow a (Q,S,s) pricing rule. According to the rule, a seller lets inflation erode the real value of its nominal price until it reaches some point $s$. Then, the seller pays the menu cost and resets the real value of its nominal price to a point randomly drawn from a distribution with support $[S,Q]$, where $s

Suggested Citation

  • Kenneth Burdett & Guido Menzio, 2018. "The (Q,S,s) Pricing Rule," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(2), pages 892-928.
    • Handle: RePEc:oup:restud:v:85:y:2018:i:2:p:892-928.
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    File URL: http://hdl.handle.net/10.1093/restud/rdx048
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    Cited by:

    1. Rafael R. Guthmann, 2024. "Price dispersion in dynamic competition," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 78(4), pages 1203-1232, December.
    2. Guido Menzio & Nicholas Trachter, 2018. "Equilibrium Price Dispersion Across and Within Stores," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 28, pages 205-220, April.
    3. Böheim, René & Hackl, Franz & Hölzl-Leitner, Michael, 2021. "The impact of price adjustment costs on price dispersion in e-commerce," International Journal of Industrial Organization, Elsevier, vol. 77(C).
    4. Tovonony Razafindrabe, 2017. "Nonlinearity and asymmetry in the exchange rate pass-through: What role for nominal price stickiness?," Review of International Economics, Wiley Blackwell, vol. 25(4), pages 711-732, September.
    5. Pablo D. Fajgelbaum, 2013. "Labor Market Frictions, Firm Growth, and International Trade," NBER Working Papers 19492, National Bureau of Economic Research, Inc.
    6. Yu Zhu & Randall Wright & Damien Gaumont, 2017. "Modeling House Prices," 2017 Meeting Papers 744, Society for Economic Dynamics.
    7. Andres Drenik, 2017. "Pricing in Multiple Currencies in Domestic Markets," 2017 Meeting Papers 1418, Society for Economic Dynamics.
    8. Francisca Sara-Zaror, 2024. "Inflation, Price Dispersion, and Welfare: The Role of Consumer Search," Finance and Economics Discussion Series 2024-047, Board of Governors of the Federal Reserve System (U.S.).
    9. Wang, Liang, 2016. "Endogenous search, price dispersion, and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 94-117.
    10. Menzio, Guido, 2024. "Search theory of imperfect competition with decreasing returns to scale," Journal of Economic Theory, Elsevier, vol. 218(C).
    11. Etro, Federico, 2017. "Research in economics and monopolistic competition," Research in Economics, Elsevier, vol. 71(4), pages 645-649.
    12. Guido Menzio, 2023. "Optimal Product Design: Implications for Competition and Growth Under Declining Search Frictions," Econometrica, Econometric Society, vol. 91(2), pages 605-639, March.

    More about this item

    Keywords

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    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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