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Price setting with menu cost for multi-product firms

  • Alvarez, Fernando
  • Lippi, Francesco

We model the pricing decisions of a multi-product firm that faces a fixed 'menu' cost: once the cost is paid, the firm can adjust the price of all its products. We characterize analytically the steady state firm’s decision in terms of the structural parameters: the variability of the flexible prices, the curvature of the profit function, the size of the menu cost, and the number of products that are sold. We provide expressions for the steady state frequency of adjustment, the hazard rate of price adjustments, and the size distribution of price changes, all in terms of the structural parameters. We study analytically the impulse response of aggregate prices and output to a monetary shock. The cumulative response of output to a monetary shock is the product of three terms: the steady state standard deviation of price changes, the average time elapsed between price changes, and a function of both the number of products and the size of the monetary shock. The size of the cumulative response of output and the length of the half-life of the response of aggregate prices to a monetary shock increase with the number of products, both of them more than double as the number of products goes from 1 to ten, quickly converging to the ones of Taylor’s staggered price model.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8863.

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Date of creation: Feb 2012
Date of revision:
Handle: RePEc:cpr:ceprdp:8863
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  1. Fernando Alvarez & Francesco Lippi & Luigi Paciello, 2010. "Optimal Price Setting with Observation and Menu Costs," EIEF Working Papers Series 1010, Einaudi Institute for Economics and Finance (EIEF), revised May 2010.
  2. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  3. 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 349-89, April.
  4. Peter J. Klenow & Benjamin A. Malin, 2010. "Microeconomic Evidence on Price-Setting," NBER Working Papers 15826, National Bureau of Economic Research, Inc.
  5. Ernesto Pasten, 2012. "Rational Inattention, Multi-Product Firms and the Neutrality of Money," 2012 Meeting Papers 346, Society for Economic Dynamics.
  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 137-55, April.
  7. Dutta, Shantanu, et al, 1999. "Menu Costs, Posted Prices, and Multiproduct Retailers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(4), pages 683-703, November.
  8. Raphael S. Schoenle & Saroj Bhattarai, 2011. "Multiproduct Firms and Price-Setting: Theory and Evidence from U.S. Producer Prices," 2011 Meeting Papers 926, Society for Economic Dynamics.
  9. Leif Danziger, 1999. "A Dynamic Economy with Costly Price Adjustments," American Economic Review, American Economic Association, vol. 89(4), pages 878-901, September.
  10. Pinelopi Goldberg & Rebecca Hellerstein, 2009. "How Rigid Are Producer Prices?," Working Papers 1184, Princeton University, Department of Economics, Center for Economic Policy Studies..
  11. Neiman, Brent, 2010. "Stickiness, synchronization, and passthrough in intrafirm trade prices," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 295-308, April.
  12. Cavallo, Alberto & Rigobon, Roberto, 2011. "The Distribution of the Size of Price Changes," Working Papers 2011-011, Banco Central de Reserva del Perú.
  13. Laurent Baudry & Hervé Le Bihan & Patrick Sevestre & Sylvie Tarrieu, 2007. "What do Thirteen Million Price Records have to Say about Consumer Price Rigidity?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(2), pages 139-183, 04.
  14. Bonomo, Marco & Carvalho, Carlos, 2004. "Endogenous Time-Dependent Rules and Inflation Inertia," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 1015-41, December.
  15. Emmanuel Dhyne & Jerzy Konieczny, 2007. "Temporal Distribution of Price Changes: Staggering in the Large and Synchronization in the Small," Working Paper Series 01-07, The Rimini Centre for Economic Analysis, revised Jul 2007.
  16. Reis, Ricardo, 2005. "Inattentive Producers," CEPR Discussion Papers 5393, C.E.P.R. Discussion Papers.
  17. repec:oup:restud:v:58:y:1991:i:1:p:141-51 is not listed on IDEAS
  18. francesco lippi & Luigi Paciello & Fernando Alvarez, 2012. "Monetary Shocks with Observation and Menu Costs," 2012 Meeting Papers 439, Society for Economic Dynamics.
  19. repec:oup:qjecon:v:124:y:2009:i:3:p:1221-1263 is not listed on IDEAS
  20. Mark Gertler & John Leahy, 2006. "A Phillips Curve with an Ss Foundation," NBER Working Papers 11971, National Bureau of Economic Research, Inc.
  21. Alberto Cavallo, 2015. "Scraped Data and Sticky Prices," NBER Working Papers 21490, National Bureau of Economic Research, Inc.
  22. repec:oup:restud:v:44:y:1977:i:2:p:287-303 is not listed on IDEAS
  23. repec:oup:restud:v:39:y:1972:i:1:p:17-26 is not listed on IDEAS
  24. repec:tpr:qjecon:v:124:y:2009:i:3:p:1221-1263 is not listed on IDEAS
  25. Fredrik Wulfsberg, 2009. "Price adjustments and inflation - evidence from Norwegian consumer price data 1975-2004," Working Paper 2009/11, Norges Bank.
  26. Etienne Gagnon, 2007. "Price setting during low and high inflation: evidence from Mexico," International Finance Discussion Papers 896, Board of Governors of the Federal Reserve System (U.S.).
  27. Baccarin, Stefano, 2009. "Optimal impulse control for a multidimensional cash management system with generalized cost functions," European Journal of Operational Research, Elsevier, vol. 196(1), pages 198-206, July.
  28. repec:oup:restud:v:60:y:1993:i:4:p:889-902 is not listed on IDEAS
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