Optimal Price Setting With Observation and Menu Costs

Fernando E. Alvarez, Francesco Lippi and Luigi Paciello ()

The Quarterly Journal of Economics, 2011, vol. 126, issue 4, 1909-1960

Abstract: We study the price-setting problem of a firm in the presence of both observation and menu costs. The firm optimally decides when to "review" costly information on the adequacy of its price. Upon each review, the firm chooses whether to adjust its price, one or more times, before the next price review. Each price adjustment entails paying a menu cost. The firm's choices map into several statistics: the frequency of price reviews, the frequency of price adjustments, the size distribution of price changes, and the hazard rate of price adjustments. The simultaneous presence of observation and menu costs produces complementarities that change the predictions of simpler models featuring one cost only. For instance, infrequent observations may reflect a high menu cost rather than high observation costs: in spite of these complementarities, we show that the ratio of the two costs is identified by several statistics on price observations and adjustments. Copyright 2011, Oxford University Press.

Date: 2011
References: Add references at CitEc
Citations: View citations in EconPapers (127)

Downloads: (external link)
http://hdl.handle.net/10.1093/qje/qjr043 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Optimal price setting with observation and menu costs (2010)
Working Paper: Optimal Price Setting with Observation and Menu Costs (2010)
Working Paper: Optimal price setting with observation and menu costs (2010)
Working Paper: Optimal price setting with observation and menu costs (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:qjecon:v:126:y:2011:i:4:p:1909-1960

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The Quarterly Journal of Economics is currently edited by Robert J. Barro, Lawrence F. Katz, Nathan Nunn, Andrei Shleifer and Stefanie Stantcheva

More articles in The Quarterly Journal of Economics from President and Fellows of Harvard College
Bibliographic data for series maintained by Oxford University Press ().