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Small price changes and menu costs

Author

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  • Saul Lach

    (The Hebrew University of Jerusalem, Israel and CEPR)

  • Daniel Tsiddon

    (Tel Aviv University, Israel and CEPR)

Abstract

We find that while some individual price changes are indeed 'small', the average price change of different products within a store in any given month is not. Moreover, the smaller the price change of an individual product, the larger the average price change of the remaining products sold by the store. We argue that these findings are consistent with extensions of menu cost models of price-setting behavior to multiproduct firms when these firms have high average costs and low marginal costs of changing prices. Copyright © 2007 John Wiley & Sons, Ltd.

Suggested Citation

  • Saul Lach & Daniel Tsiddon, 2007. "Small price changes and menu costs," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 649-656.
  • Handle: RePEc:wly:mgtdec:v:28:y:2007:i:7:p:649-656
    DOI: 10.1002/mde.1383
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    File URL: http://hdl.handle.net/10.1002/mde.1383
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    References listed on IDEAS

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    1. Ricardo J. Caballero & Eduardo M. R. A. Engel, 1999. "Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach," Econometrica, Econometric Society, vol. 67(4), pages 783-826, July.
    2. Lach, Saul & Tsiddon, Daniel, 1996. "Staggering and Synchronization in Price-Setting: Evidence from Multiproduct Firms," American Economic Review, American Economic Association, vol. 86(5), pages 1175-1196, December.
    3. Daniel Levy & Mark Bergen & Shantanu Dutta & Robert Venable, 1997. "The Magnitude of Menu Costs: Direct Evidence from Large U. S. Supermarket Chains," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 791-824.
    4. Eytan Sheshinski & Yoram Weiss, 1992. "Staggered and Synchronized Price Policies Under Inflation: The Multiproduct Monopoly Case," Review of Economic Studies, Oxford University Press, vol. 59(2), pages 331-359.
    5. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 349-389, April.
    6. Cecchetti, Stephen G., 1986. "The frequency of price adjustment : A study of the newsstand prices of magazines," Journal of Econometrics, Elsevier, vol. 31(3), pages 255-274, April.
    7. Anil K Kashyap, 1995. "Sticky Prices: New Evidence from Retail Catalogs," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 245-274.
    8. Roland Benabou, 1992. "Inflation and Efficiency in Search Markets," Review of Economic Studies, Oxford University Press, vol. 59(2), pages 299-329.
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    Citations

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    Cited by:

    1. Daniel Levy & Hainpeng (Allan) Chen & Sourav RayAuthor-Name: Mark Bergen, 2004. "Asymmetric Price Adjustment in the Small: An Implication of Rational Inattention," Emory Economics 0408, Department of Economics, Emory University (Atlanta).
    2. Jerzy D. Konieczny, 2006. "Discussion of: Lumpy Price Adjustments: A Microeconometric Analysis," Working Papers jk0035, Wilfrid Laurier University, Department of Economics, revised 1970.
    3. Daniel Levy & Haipeng (Allan) Chen & Georg Müller & Shantanu Dutta & Mark Bergen, 2010. "Holiday Price Rigidity and Cost of Price Adjustment," Economica, London School of Economics and Political Science, vol. 77(305), pages 172-198, January.
    4. Andrea Stella, 2014. "The Magnitude of Menu Costs: A Structural Estimation," 2014 Meeting Papers 436, Society for Economic Dynamics.
    5. Daniel Levy, 2007. "Price rigidity and flexibility: new empirical evidence," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 639-647.
    6. Martin Eichenbaum & Nir Jaimovich & Sergio Rebelo & Josephine Smith, 2014. "How Frequent Are Small Price Changes?," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(2), pages 137-155, April.
    7. Daniel Levy & Shantanu Dutta & Mark Bergen & Robert Venable, 1998. "Price adjustment at multiproduct retailers," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 19(2), pages 81-120.
    8. Cavallo, Alberto & Rigobon, Roberto, 2011. "The Distribution of the Size of Price Changes," Working Papers 2011-011, Banco Central de Reserva del Perú.
    9. Rajesh Chakrabarti & Barry Scholnick, 2007. "The mechanics of price adjustment: new evidence on the (un)importance of menu costs," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 657-668.
    10. Alexander L. Wolman, 2007. "The frequency and costs of individual price adjustment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(6), pages 531-552.
    11. Costain, James & Nakov, Anton, 2015. "Precautionary price stickiness," Journal of Economic Dynamics and Control, Elsevier, vol. 58(C), pages 218-234.
    12. Dhyne, Emmanuel & Fuss, Catherine & Pesaran, M. Hashem & Sevestre, Patrick, 2011. "Lumpy Price Adjustments: A Microeconometric Analysis," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(4), pages 529-540.
    13. Virgiliu Midrigan, 2005. "Menu Costs, Multi-Product Firms and Aggregate Fluctuations," Macroeconomics 0511004, EconWPA.
    14. Demery, David, 2012. "State-dependent pricing and the non-neutrality of money," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 933-944.
    15. Adam Reiff & Peter Karadi, 2014. "Menu Costs, Aggregate Fluctuations and Large Shocks," 2014 Meeting Papers 914, Society for Economic Dynamics.
    16. Chen, Haipeng (Allan) & Levy, Daniel & Ray, Sourav & Bergen, Mark, 2008. "Asymmetric price adjustment in the small," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 728-737, May.
    17. Bhattarai, Saroj & Schoenle, Raphael, 2014. "Multiproduct firms and price-setting: Theory and evidence from U.S. producer prices," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 178-192.
    18. Carlsson, Mikael, 2014. "Selection Effects in Producer-Price Setting," Working Paper Series 2014:6, Uppsala University, Department of Economics.

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