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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
Date of revision:
Publication status: published as Price setting with menu cost for multi-product firms, with Francesco Lippi, 2013. forthcoming, Econometrica.
Handle: RePEc:nbr:nberwo:17923
Note: EFG
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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  1. Alberto Cavallo & Roberto Rigobon, 2011. "The Distribution of the Size of Price Changes," NBER Working Papers 16760, National Bureau of Economic Research, Inc.
  2. Mark Gertler & John Leahy, 2006. "A Phillips Curve with an Ss Foundation," NBER Working Papers 11971, National Bureau of Economic Research, Inc.
  3. F. Alvarez & F. Lippi & L. Paciello, 2010. "Optimal price setting with observation and menu costs," 2010 Meeting Papers 478, Society for Economic Dynamics.
  4. Klenow, Peter J. & Malin, Benjamin A., 2010. "Microeconomic Evidence on Price-Setting," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 6, pages 231-284 Elsevier.
  5. Martin S. Eichenbaum & Nir Jaimovich & Sergio Rebelo & Josephine Smith, 2012. "How Frequent Are Small Price Changes?," NBER Working Papers 17956, National Bureau of Economic Research, Inc.
  6. Etienne Gagnon, 2009. "Price Setting During Low and High Inflation: Evidence from Mexico," The Quarterly Journal of Economics, MIT Press, vol. 124(3), pages 1221-1263, August.
  7. Ricardo Reis, 2006. "Inattentive Producers," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 793-821.
  8. Ernesto Pastén, 2012. "Rational Inattention, Multi-Product Firms and the Neutrality of Money," Working Papers Central Bank of Chile 664, Central Bank of Chile.
  9. Fernando Alvarez & Francesco Lippi & Luigi Paciello, 2013. "Monetary Shocks with Observation and menu Costs," EIEF Working Papers Series 1310, Einaudi Institute for Economics and Finance (EIEF), revised May 2013.
  10. 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.
  11. Marco Bonomo & Carlos Carvalho, 2004. "Endogenous Time-Dependent Rules and Inflation Inertia," Macroeconomics 0402005, EconWPA, revised 19 May 2005.
  12. Shantanu Dutta & Mark Bergen & Daniel Levy & Robert Venable, 2005. "Menu Costs, Posted Prices, and Multiproduct Retailers," Macroeconomics 0505007, EconWPA.
  13. 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, 04.
  14. Pinelopi Goldberg & Rebecca Hellerstein, 2009. "How Rigid Are Producer Prices?," Working Papers 1184, Princeton University, Department of Economics, Center for Economic Policy Studies..
  15. 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.
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  20. repec:nbr:nberre:0126 is not listed on IDEAS
  21. Alberto Cavallo, 2015. "Scraped Data and Sticky Prices," NBER Working Papers 21490, National Bureau of Economic Research, Inc.
  22. Fredrik Wulfsberg, 2009. "Price adjustments and inflation - evidence from Norwegian consumer price data 1975-2004," Working Paper 2009/11, Norges Bank.
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  26. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 349-89, April.
  27. Baccarin, Stefano, 2009. "Optimal impulse control for a multidimensional cash management system with generalized cost functions," European Journal of Operational Research, Elsevier, vol. 196(1), pages 198-206, July.
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