Price-Adjustment Costs and Adjustment Frequency: An Analysis with Individual Data

Fernando Merino

No 1712, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: Different models have stressed the importance of the costs of price-adjustment given that its existence justifies the possibility of some real effects caused by changes in nominal variables. This paper is focused on the evaluation of these costs from a microeconomic perspective. Using a database of Spanish manufacturing firms, the relationship between the frequency of price adjustment and the price diffusion mechanism (and then, the adjustment-cost) in analysed, taking into consideration other control variables as the figure and sign of the price variation, or the position in the market. The nature of the dependent variable (discrete) and the upper censorship in the database (all those firms which change the price more than three times during the year have the same indicator) makes necessary the use of some non-usual econometric techniques, such as ordered probit, and censored discrete dependent variables models. The results show an asymmetric behaviour for positive and negative price variations, as well as the fact that firms which will incur in monetary costs to adjust its price (because they announce them by catalogues or similar methods) will do it less frequently, with the figure of the price variation controlled. Besides, the results allow a comparison of the different econometric techniques to estimate models with discrete dependent variables.

Date: 2000-08-01
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