Prices and Market Shares in a Menu Cost Model

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.

Market Structure and Monetary Non-neutrality

“…For both reasons, a multisector model that replicates the empirical heterogeneity in price flexibility across sectors generates significant non-neutrality. Like Klenow and Willis (2016) and Burstein and Hellwig (2007), the authors conclude that macro complementarities that slow the response of aggregate nominal cost are the most likely candidate for monetary non-neutrality. 13 The dynamic complementarity arising here is different and derives from explicitly strategic behavior under nominal rigidity.…”

“…Second, a decreasing returns to scale technology (DRS), as studied by Burstein and Hellwig (2007), implies variable marginal cost. When the quantity a firm sells decreases, its marginal cost decreases:…”

“…Because of this, Klenow and Willis (2016) and Burstein and Hellwig (2007) find that values of ∆ that reduce monetary neutrality, require large menu costs and idiosyncratic shocks in order to match the same data on good-level price adjustment. 46 In the duopoly model amplification occurs due to complementarity, but at even lowerξ and σ z than the monopolistically competitive model.…”

“…Klenow and Willis (2016) introduce non-CES preferences. 8 Burstein and Hellwig (2007) introduce decreasing returns to scale in production. 9 Their findings are that such complementarities cannot be a source of propagation.…”

Welfare Costs of Inflation in a Menu Cost Model

“…We base our model and calibration of product-level price changes on our earlier work in Burstein and Hellwig (2007) extended with a complete specification of a representative household's preferences.…”