Prices and Market Shares in a Menu Cost Model

49 Pages Posted: 5 Jun 2008

See all articles by Ariel T. Burstein

Ariel T. Burstein

University of California, Los Angeles (UCLA) - Department of Economics

Christian Hellwig

University of Toulouse 1 - Toulouse School of Economics (TSE)

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Abstract

Pricing complementarities play a key role in determining the propagation of monetary disturbances in sticky price models. We propose a procedure to infer the degree of firm-level pricing complementarities in the context of a menu cost model of price adjustment using data on prices and market shares at the level of individual varieties. We then apply this procedure by calibrating our model (in which pricing complementarities are based on decreasing returns to scale at the variety level) using scanner data from a large grocery chain. Our data is consistent with moderately strong levels of firm-level pricing complementarities, but they appear too weak to generate much larger aggregate real effects from nominal shocks than a model without these pricing complementarities.

Keywords: Menu Costs, Nominal Rigidities, Pricing Complementarities

JEL Classification: E31, E32

Suggested Citation

Burstein, Ariel T. and Hellwig, Christian, Prices and Market Shares in a Menu Cost Model. CEPR Discussion Paper No. DP6504. Available at SSRN: https://ssrn.com/abstract=1140031

Ariel T. Burstein (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
Bunche Hall 8365
Los Angeles, CA 90095-1477
United States
310-206-6732 (Phone)
310-825-9528 (Fax)

Christian Hellwig

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

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