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The Magnitude of Menu Costs: A Structural Estimation

Andrea Stella

No 436, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: The leading theories on monetary policy non-neutrality require some degree of price rigidity, which is often introduced by assuming fixed costs of price adjustment, also known as menu costs. Empirical evidence on the existence of such menu costs is scarce. Using weekly data on prices, costs and units sold by a supermarket chain, I estimate a discrete-choice dynamic model of a multi-product firm facing menu costs with a moment inequalities approach. This empirical methodology allows me to estimate two types of fixed costs of price adjustment: costs that are independent of the number of items that change prices and costs that are incurred at each item’s price change. I find that both types of menu costs exist and are substantial. The total cost from changing prices is estimated to be bounded between 0.22% and 0.59% of revenues and between 11.05% and 29.32% of net margins, depending on the specification. The first type of fixed cost accounts for up to 85% of this expense, pointing to substantial economies of scope in price setting.

Date: 2014
New Economics Papers: this item is included in nep-com and nep-dcm
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