Prices and Market Shares in a Menu Cost Model
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 complementarities.
We thank Andrew Atkeson, Mark Gertler, Mike Golosov, Rebecca Hellerstein, Pete Klenow, John Leahy, Virgiliu Midrigan, and Michael Woodford for helpful discussions, and various audiences at seminars and confererences for their comments. Cesar Serra and Julian Smoller provided outstanding research assistance. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.