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Do Menu Costs Make Prices Sticky?

  • Thomas A. Eife

    ()

    (University of Heidelberg, Department of Economics)

This paper studies whether menu costs are large enough to explain why firms are so reluctant to change their prices. Without actually estimating menu costs, we can infer their relevance for firms' price setting decisions from observed pricing behavior around a currency changeover. At a currency changeover, firms have to reprint their price tags (menus) independently of whether or not they want to change prices. And if this is costly, firms' price setting behavior is altered in the months around the changeover. Using data from the Euro-changeover, the paper estimates that menu costs can explain a stickiness of around 30 days which is considerably less than the 7 to 24-month stickiness we observe in retailing and in the service sector. The reluctance of firms to adjust prices more frequently appears to be caused by factors other than menu costs.

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File URL: http://www.uni-heidelberg.de/md/awi/forschung/dp477.pdf
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Paper provided by University of Heidelberg, Department of Economics in its series Working Papers with number 0477.

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Length: 30 pages
Date of creation: Oct 2008
Date of revision: Oct 2008
Handle: RePEc:awi:wpaper:0477
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  6. Levy, Daniel, et al, 1997. "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 791-825, August.
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  8. Peter J. Klenow & Oleksiy Kryvtsov, 2007. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," Discussion Papers 07-007, Stanford Institute for Economic Policy Research.
  9. Fengler, Matthias R. & Winter, Joachim K., 2000. "Price variability and price dispersion in a stable monetary environment: Evidence from German retail markets," SFB 373 Discussion Papers 2000,90, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
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  14. Hall, Simon & Walsh, Mark & Yates, Anthony, 2000. "Are UK Companies' Prices Sticky?," Oxford Economic Papers, Oxford University Press, vol. 52(3), pages 425-46, July.
  15. Bart Hobijn & Federico Ravenna & Andrea Tambalotti, 2006. "Menu Costs at Work: Restaurant Prices and the Introduction of the Euro," The Quarterly Journal of Economics, MIT Press, vol. 121(3), pages 1103-1131, 08.
  16. Hoffmann, Johannes & Kurz-Kim, Jeong-Ryeol, 2006. "Consumer price adjustment under the microscope: Germany in a period of low inflation," Discussion Paper Series 1: Economic Studies 2006,16, Deutsche Bundesbank, Research Centre.
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  20. Danziger, Leif, 1983. "Price Adjustments with Stochastic Inflation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 699-707, October.
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