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