(Q,S,s) Pricing Rules

Kenneth Burdett () and Guido Menzio
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Kenneth Burdett: Department of Economics, University of Pennsylvania

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

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.

Keywords: Search frictions; Menu costs; Sticky prices (search for similar items in EconPapers)
JEL-codes: D11 D21 D43 E32 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2013-05-29
New Economics Papers: this item is included in nep-com and nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The (Q,S,s) Pricing Rule (2018)
Working Paper: (Q,S,s) Pricing Rules (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:13-024

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