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Estimation of adjustment costs in a model of state-dependent pricing

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  • Jonathan L. Willis

Abstract

This paper provides a framework for direct analysis of the underlying price adjustment costs in an industry. A dynamic programming problem is specified for monopolistically competitive firms that face idiosyncratic costs of price adjustment. A numerical solution is calculated using value function iteration. I estimate the structural parameters of the model using data on magazine cover prices. Among the parameters estimated are the mean, variance, and persistence of the adjustment cost process. The estimated distribution of adjustment costs is nondegenerate, and the average adjustment cost paid by firms is large in comparison to other results in the literature.

Suggested Citation

  • Jonathan L. Willis, 2000. "Estimation of adjustment costs in a model of state-dependent pricing," Research Working Paper RWP 00-07, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:rwp00-07
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    References listed on IDEAS

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    Cited by:

    1. Alvarez, Fernando & Le Bihan, Hervé & Lippi, Francesco, 2013. "Small and large price changes and the propagation of monetary shocks," CEPR Discussion Papers 9770, C.E.P.R. Discussion Papers.
    2. Daniel Levy & Andrew T. Young, 2004. ""The Real Thing:" Nominal Price Rigidity of the Nickel Coke, 1886-1959," Working Papers 2004-2, Bar-Ilan University, Department of Economics.
    3. Richards, Timothy J. & Patterson, Paul M., 2004. "Causes of retail price fixity: an empirical analysis," Journal of Economics and Business, Elsevier, vol. 56(2), pages 117-136.
    4. Andrew T. Young & Daniel Levy, 2014. "Explicit Evidence of an Implicit Contract," Journal of Law, Economics, and Organization, Oxford University Press, vol. 30(4), pages 804-832.
    5. Gautier, Erwan & Le Bihan, Hervé, 2011. "Time-varying (S, s) band models: Properties and interpretation," Journal of Economic Dynamics and Control, Elsevier, vol. 35(3), pages 394-412, March.
    6. Gautier, E. & Le Bihan, H., 2009. "Time-varying (S, s) band models: empirical properties and interpretation," Working papers 231, Banque de France.
    7. Erwan Gautier, 2009. "Les ajustements microéconomiques des prix : une synthèse des modèles théoriques et résultats empiriques," Revue d'économie politique, Dalloz, vol. 119(3), pages 323-372.
    8. Letterie, Wilko & Nilsen, Øivind A., 2016. "Price Changes - Stickiness and Internal Coordination in Multiproduct Firms," Discussion Paper Series in Economics 21/2016, Norwegian School of Economics, Department of Economics.
    9. Watson, Anna, 2016. "Trade openness and inflation: The role of real and nominal price rigidities," Journal of International Money and Finance, Elsevier, vol. 64(C), pages 137-169.
    10. Mark J. Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2004. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," The Review of Economics and Statistics, MIT Press, vol. 86(2), pages 514-533, May.
    11. Jonathan L. Willis, 2003. "Implications of structural changes in the U.S. economy for pricing behavior and inflation dynamics," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 5-27.
    12. Anna Watson, 2010. "The Impact of Trade Integration and Competition on Real and Nominal Price Rigidities: Insights from a New-Keynesian DSGE Model," DEGIT Conference Papers c015_061, DEGIT, Dynamics, Economic Growth, and International Trade.
    13. Yuriy Gorodnichenko, 2008. "Endogenous information, menu costs and inflation persistence," NBER Working Papers 14184, National Bureau of Economic Research, Inc.
    14. Sharon Kozicki & Peter A. Tinsley, 2002. "Alternative sources of the lag dynamics of inflation," Research Working Paper RWP 02-12, Federal Reserve Bank of Kansas City.
    15. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
    16. Mark Zbaracki & Mark Bergen & Shantanu Dutta & Daniel Levy & Mark Ritson, 2005. "Beyond the Cost of Price Adjustment: Investments in Pricing Capital," Macroeconomics 0505013, EconWPA.
    17. Knotek II, Edward S., 2008. "Convenient prices, currency, and nominal rigidity: Theory with evidence from newspaper prices," Journal of Monetary Economics, Elsevier, pages 1303-1316.
    18. Burstein, Ariel T., 2006. "Inflation and output dynamics with state-dependent pricing decisions," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1235-1257, October.
    19. Russell Cooper & Joao Ejarque, 2000. "Exhuming Q: Market Power vs. Capital Market Imperfections," Econometric Society World Congress 2000 Contributed Papers 0528, Econometric Society.
    20. Klenow, Peter J. & Willis, Jonathan L., 2007. "Sticky information and sticky prices," Journal of Monetary Economics, Elsevier, vol. 54(Supplemen), pages 79-99, September.
    21. 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.
    22. Lapo Filistrucchi, 2005. "The Impact of Internet on the Market for Daily Newspapers in Italy," Economics Working Papers ECO2005/12, European University Institute.
    23. Andrew T. Young & Daniel Levy, 2014. "Explicit Evidence of an Implicit Contract," Journal of Law, Economics, and Organization, Oxford University Press, vol. 30(4), pages 804-832.
    24. Mark Bils & Peter J. Klenow & Oleksiy Kryvtsov, 2003. "Sticky prices and monetary policy shocks," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-9.
    25. Russell W. Cooper & Joao Ejarque, 2001. "Exhuming Q: market power capital market imperfections," Working Papers 611, Federal Reserve Bank of Minneapolis.

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