Price Setting with Menu Cost for Multi-Product Firms

By Fernando Alvarez, Francesco Lippi. 2012

67 citations recorded by the source corpus.

We model the decisions of a multi-product firm that faces a fixed "menu" cost: once it is paid, the firm can adjust the price of all its products. We characterize analytically the steady state firm's decisions in terms of the structural parameters: the variability of the flexible prices, the curvature of the profit function, the size of the menu cost, and the number of products sold. We provide expressions for the steady state frequency of adjustment, the hazard rate of price adjustments, and the size distribution of price changes, all in terms of the structural parameters. We study analytically the impulse response of aggregate prices and output to a monetary shock. The size of the output response and its duration increase with the number of products, they more than double as the number of products goes from 1 to ten, quickly converging to the ones of Taylor's staggered price model.

Subfields: Economics and Econometrics, Marketing

View Paper: https://www.semanticscholar.org/paper/a144d4b5d145ac7b426eef786edfaff47d4395f5

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Citations in the corpus

Price Rigidity: Microeconomic Evidence and Macroeconomic Implications (2013, unknown): “Alvarez and Lippi (2012) explore the implications of such economies of scope in the price setting in more detail.”
Scraped Data and Sticky Prices (2016, unknown): “Many of the pricing behaviors observed with online data resemble the ones produced by models that allow for a combination of observations and menu costs, such as the one developed by Alvarez et al. (2011). But this paper is not meant to provide empirical evidence for a particular model.”
Inflation Dynamics and Time-Varying Volatility: New Evidence and an Ss Interpretation* (2014, background): “Alvarez and Lippi (2013) derive impulse response functions in an analytical menu cost model and show that in this model, aggregate price exibility is declining in std ( p) =freq.”
Price Setting With Menu Cost for Multiproduct Firms (2014, methodology): “See Appendix A for the proof and see Appendixes F1 and F2 in Alvarez and Lippi (2012) for a closed form solution and a lemma with the analytical characterization of Θn and Φn stated in part (iii) of Proposition 8.”