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Menu Costs and Dynamic Duopoly

  • Kazuko Kano

Examining a state-dependent pricing model in the presence of menu costs and dynamic duopolistic interactions, this paper claims that the assumption regarding market structure is crucial for iden- tifying the menu costs for price changes. Prices in a dynamic duopolistic market can be more rigid than those in more competitive markets, such as a monopolistic-competition market. Therefore, the estimates of menu costs under monopolistic competition are potentially biased upward due to the price rigidity from strategic interactions between dynamic duopolistic firms. By developing and estimating a dynamic discrete-choice model with duopoly to correct for this potential bias, this paper provides empirical evidence that dynamic strategic interactions, as well as menu costs, play an important role in explaining the observed degree of price rigidity in weekly retail prices.

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File URL: http://gcoe.ier.hit-u.ac.jp/research/discussion/2008/pdf/gd12-263.pdf
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Paper provided by Institute of Economic Research, Hitotsubashi University in its series Global COE Hi-Stat Discussion Paper Series with number gd12-263.

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Date of creation: Dec 2012
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Handle: RePEc:hst:ghsdps:gd12-263
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  10. Victor Aguirregabiria & Pedro Mira, 1999. "Swapping the Nested Fixed-Point Algorithm: a Class of Estimators for Discrete Markov Decision Models," Computing in Economics and Finance 1999 332, Society for Computational Economics.
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  17. Sam Peltzman, 2000. "Prices Rise Faster than They Fall," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 466-502, June.
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  19. Slade, Margaret E, 1998. "Optimal Pricing with Costly Adjustment: Evidence from Retail-Grocery Prices," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 87-107, January.
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  21. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
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  24. Alan L. Montgomery, 1997. "Creating Micro-Marketing Pricing Strategies Using Supermarket Scanner Data," Marketing Science, INFORMS, vol. 16(4), pages 315-337.
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