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Price Setting with menu cost for Multi-product firms

  • Fernando E. Alvarez
  • Francesco Lippi

We model the decisions of a multi-product firm that faces a fixed "menu" cost: once it is paid, the firm can adjust the price of all its products. We characterize analytically the steady state firm's decisions 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. 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 size of the output response and its duration increase with the number of products, they 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17923.

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Date of creation: Mar 2012
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Publication status: published as Price setting with menu cost for multi-product firms, with Francesco Lippi, 2013. forthcoming, Econometrica.
Handle: RePEc:nbr:nberwo:17923
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  1. Neiman, Brent, 2010. "Stickiness, synchronization, and passthrough in intrafirm trade prices," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 295-308, April.
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  19. repec:pri:cepsud:193goldberg is not listed on IDEAS
  20. Alberto Cavallo & Roberto Rigobon, 2011. "The Distribution of the Size of Price Changes," NBER Working Papers 16760, National Bureau of Economic Research, Inc.
  21. Daniel Tsiddon, 1993. "The (Mis)Behaviour of the Aggregate Price Level," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 889-902.
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  23. Etienne Gagnon, 2009. "Price Setting during Low and High Inflation: Evidence from Mexico," The Quarterly Journal of Economics, Oxford University Press, vol. 124(3), pages 1221-1263.
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