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(Q,S,s) Pricing Rules

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  • Kenneth Burdett

    () (Department of Economics, University of Pennsylvania)

  • Guido Menzio

    () (Department of Economics, University of Pennsylvania and NBER)

Abstract

We study the effect of menu costs on the pricing behavior of sellers and on the cross-sectional distribution of prices in the search-theoretic model of imperfect competition of Burdett and Judd (1983). We find that, when menu costs are small, the equilibrium is such that sellers follow a (Q, S, s) pricing rule. According to a (Q, S, s) rule, a seller lets inflation erode the real value of its nominal price until it reaches some point s. Then, the seller pays the menu cost and changes its nominal price so that the real value of the new price is randomly drawn from a distribution with support [S,Q], where Q is the buyer’s reservation price and S is some price between s and Q. Only when the menu cost is relatively large, the equilibrium is such that sellers follow a standard (S; s) pricing rule. We argue that whether sellers follow a (Q, S, s) or an (S, s) rule matters for the estimation of menu costs and seller-specific shocks.

Suggested Citation

  • Kenneth Burdett & Guido Menzio, 2013. "(Q,S,s) Pricing Rules," PIER Working Paper Archive 13-024, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  • Handle: RePEc:pen:papers:13-024
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    Cited by:

    1. Wang, Liang, 2016. "Endogenous search, price dispersion, and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 94-117.
    2. Tovonony Razafindrabe, 2017. "Nonlinearity and asymmetry in the exchange rate pass-through: What role for nominal price stickiness?," Review of International Economics, Wiley Blackwell, vol. 25(4), pages 711-732, September.
    3. Pablo D. Fajgelbaum, 2013. "Labor Market Frictions, Firm Growth, and International Trade," NBER Working Papers 19492, National Bureau of Economic Research, Inc.
    4. Etro, Federico, 2017. "Research in economics and monopolistic competition," Research in Economics, Elsevier, vol. 71(4), pages 645-649.
    5. Yu Zhu & Randall Wright & Damien Gaumont, 2017. "Modeling House Prices," 2017 Meeting Papers 744, Society for Economic Dynamics.
    6. Andres Drenik, 2017. "Pricing in Multiple Currencies in Domestic Markets," 2017 Meeting Papers 1418, Society for Economic Dynamics.

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    More about this item

    Keywords

    Search frictions; Menu costs; Sticky prices;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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