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Optimal price setting with observation and menu costs

  • F. Alvarez

    (U Chicago)

  • F. Lippi

    (U Sassari)

  • L. Paciello

    (EIEF)

The goal of the paper is to study how the firm's choices map into several observable statistics, depending on the level and relative magnitude of the information vs the menu cost. The observable statistics are: the frequency of price reviews, the frequency of price adjustments, the size-distribution of price adjustments, and the shape of the hazard rate of price adjustments. We provide an analytical characterization of the firm decisions and a mapping from the structural parameters to the observable statistics. We compare these statistics with the ones obtained for the models with only one type of cost. The predictions of the model can, with suitable Êdata, be used to quantify the importance of the menu cost vs. the information cost.

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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 478.

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Date of creation: 2010
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Handle: RePEc:red:sed010:478
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