NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Price Setting with menu cost for Multi-product firms

Fernando E. Alvarez, Francesco Lippi

NBER Working Paper No. 17923
Issued in March 2012
NBER Program(s):   EFG

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.

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Document Object Identifier (DOI): 10.3386/w17923

Price setting with menu cost for multi-product firms, with Francesco Lippi, 2013. forthcoming, Econometrica. citation courtesy of

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