Product Cycles and Prices: a Search Foundation

Mei Dong, Toshiaki Shoji and Yuki Teranishi

No e161, Working Papers from Tokyo Center for Economic Research

Abstract: This paper develops a price model with product cycles characterized by product entries and exits. Through a frictional product market with search and matching frictions, an endogenous product cycle is accompanied by a price cycle. This model nests the New Keynesian Phillips curve as a special case and generates several new phenomena in business cycle moments with product cycles. Using product-level micro data in Japan, we show that our price model well captures the observed features among product entry, number of products, demand, and price. Our model with a frictional product market replicates correlations between product matching probability and other variables. In a general equilibrium model for the Japanese economy, an endogenous product entry increases a price variation by 23 percent. This number increases to 35 percent with a price discounting after a first price. All results suggest that product cycles and search frictions play fundamental roles in describing price dynamics.

Pages: 65 pages
Date: 2021-04
New Economics Papers: this item is included in nep-com and nep-dge
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