Prices and Market Shares in a Menu Cost Model

Ariel Tomas Burstein and Christian Hellwig

No 6504, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Pricing complementarities play a key role in determining the propagation of monetary disturbances in sticky price models. We propose a procedure to infer the degree of firm-level pricing complementarities in the context of a menu cost model of price adjustment using data on prices and market shares at the level of individual varieties. We then apply this procedure by calibrating our model (in which pricing complementarities are based on decreasing returns to scale at the variety level) using scanner data from a large grocery chain. Our data is consistent with moderately strong levels of firm-level pricing complementarities, but they appear too weak to generate much larger aggregate real effects from nominal shocks than a model without these pricing complementarities.

Keywords: Menu Costs; Nominal Rigidities; Pricing Complementarities (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2007-10
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Working Paper: Prices and Market Shares in a Menu Cost Model (2007)
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