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A note on price adjustment with menu cost for multi-product firms


  • Fernando Alvarez

    (University of Chicago)

  • Francesco Lippi

    (University of Sassari, EIEF)


We study the stylized problem of a multi-product firm that can revise prices only after paying a fixed “menu” cost. The key assumption, introduced by Lach and Tsiddon (1996, 2007) and Midrigan (2007, 2009), is that once the menu cost is paid the firm can adjust the price of all its products. The firm’s problem is to minimize the deviations of the profits incurred relative to the flexible price case, i.e. the case with no menu cost. We completely characterize the solution of a simple symmetric problem 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 sold by the firm. We also provide analytical expressions for the frequency of adjustment, the hazard rate of price adjustments, and the distribution of price changes in terms of the structural parameters.

Suggested Citation

  • Fernando Alvarez & Francesco Lippi, 2010. "A note on price adjustment with menu cost for multi-product firms," EIEF Working Papers Series 1018, Einaudi Institute for Economics and Finance (EIEF), revised Dec 2010.
  • Handle: RePEc:eie:wpaper:1018

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    References listed on IDEAS

    1. Fernando E. Alvarez & Francesco Lippi & Luigi Paciello, 2011. "Optimal Price Setting With Observation and Menu Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 126(4), pages 1909-1960.
    2. 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.
    3. Alberto Cavallo, 2015. "Scraped Data and Sticky Prices," NBER Working Papers 21490, National Bureau of Economic Research, Inc.
    4. Emmanuel Dhyne & Jerzy Konieczny, 2007. "Temporal Distribution of Price Changes : Staggering in the Large and Synchronization in the Small," Working Paper Research 116, National Bank of Belgium.
    5. Caballero, Ricardo J. & Engel, Eduardo M.R.A., 2007. "Price stickiness in Ss models: New interpretations of old results," Journal of Monetary Economics, Elsevier, vol. 54(Supplemen), pages 100-121, September.
    6. Mikhail Golosov & Robert E. Lucas Jr., 2007. "Menu Costs and Phillips Curves," Journal of Political Economy, University of Chicago Press, vol. 115, pages 171-199.
    7. 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, April.
    8. repec:pri:cepsud:211schoenle is not listed on IDEAS
    9. Neiman, Brent, 2010. "Stickiness, synchronization, and passthrough in intrafirm trade prices," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 295-308, April.
    10. 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.
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    Cited by:

    1. 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.

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