On what states do prices depend? Answers from Ecuador

Mario Crucini (), Anthony Landry () and Craig Benedict
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Craig Benedict: Vanderbilt University

No 722, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: An important challenge for macroeconomics is to understand the reasons that retail prices change infrequently and the implications of this pricing behavior for economic welfare and allocative efficiency. This paper develops a menu cost model of pricing in which retail firms intermediate trade between manufacturers of goods and final consumers. In particular, retail firms purchase manufactured goods in a competitive global market and employ workers to sell the goods in retail outlets at a markup over marginal cost. An important facet of our analysis is that the labor-cost share of retail production differs across goods in the consumption basket. Consequently, firms with different cost structures will change prices by different amounts and at different frequencies despite facing a common menu cost. This allows us to account for some of the cross-sectional differences observed in the frequency of price changes across goods. We apply this model to Ecuador to take advantage of a rich database of monthly retail prices of more than 200 goods and services across 12 Ecuadorian cities. Ecuador is also an interesting case study for menu cost pricing because it underwent a number of dramatic changes in inflation and exchange rate regimes, with a currency crisis and hyperinflation followed by adoption of the US dollar as the unit of account.

Date: 2014
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Related works:
Working Paper: On What States Do Prices Depend? Answers from Ecuador (2016)
Working Paper: On what states do prices depend? Answers from Ecuador (2016)
Working Paper: On what states do prices depend? answers from ecuador (2016)
Working Paper: On What States Do Prices Depend? Answers From Ecuador (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed014:722

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