Multiproduct Firms and Price-Setting: Theory and Evidence from U.S. Producer Prices

Abstract

In this paper, we establish three new facts about price-setting by multi-product firms and contribute a model that can explain our findings. Our findings have important implications for real effects of nominal shocks and provide guidance for how to model pricing decisions of firms. On the empirical side, using micro-data on U.S. producer prices, we first show that firms selling more goods adjust their prices more frequently but on average by smaller amounts. Moreover, the higher the number of goods, the lower is the fraction of positive price changes and the more dispersed the distribution of price changes. Second, we document substantial synchronization of price changes within firms across products and show that synchronization plays a dominant role in explaining pricing dynamics. Third, we find that within-firm synchronization of price changes increases as the number of goods increases. On the theoretical side, we present a state-dependent pricing model where multiproduct firms face both aggregate and idiosyncratic shocks. When we allow for firm-specific menu costs and trend inflation, the model matches the empirical findings.

Microdata Evidence on the Empirical Importance of Selection Effects in Menu‐Cost Models

“…Also, in the online Appendix D we show that the findings are robust to only relying on single‐product firms. This result does not only speak to the issue of classical measurement errors, but also implies that any differences in observed pricing patterns between single‐ and multiproduct producers, emphasized in empirical work by Bhattarai and Schoenle (), and implied by the multiproduct extension of the menu‐cost model by Midrigan () and Karadi and Reiff (), are not important for the overall conclusions of this paper.…”

Aggregation and the Staggering of Price Changes

“…Chaumont et al (2011) report that synchronization of price changes across stores varies greatly between grocery chains in Chile. Bhattarai and Schoenle (2012) report stronger synchronization within firms than within industries in U.S. producer price data. Neiman (2010) compares intra-firm with arm's length transactions in U.S. exports and finds that price changes are less synchronized for intra-firm transactions.…”

“…] within the same store is highly synchronized" (p. 1175). Bhattarai and Schoenle (2012) write that there is "substantial synchronization [. .…”

Price Setting With Menu Cost for Multiproduct Firms

“…For instance, when n = 10, the level of the hazard rate evaluated at the expected duration is about twice the hazard for n = 2. This is a prediction that can be tested in the cross section using the data set in Bhattarai and Schoenle (2011) or Wulfsberg (2010).…”