DP6504 Prices and Market Shares in a Menu Cost Model

Author(s): Ariel Tomas Burstein, Christian Hellwig
Publication Date: October 2007
Keyword(s): Menu Costs, Nominal Rigidities, Pricing Complementarities
JEL(s): E31, E32
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6504

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.