Estimation of Adjustment Costs in a Model of State-Dependent Pricing

This paper provides a framework for direct analysis of the underlying price adjustment costs in an industry. A dynamic programming problem is specified for monopolistically competitive firms that face idiosyncratic costs of price adjustment. A numerical solution is calculated using value function iteration. I estimate the structural parameters of the model using data on magazine cover prices. Among the parameters estimated are the mean, variance, and persistence of the adjustment cost process. The estimated distribution of adjustment costs is nondegenerate, and the average adjustment cost paid by firms is large in comparison to other results in the literature.

[1]  Jonathan L. Willis.  Preliminary and Incomplete 1 General Equilibrium of a Monetary Model with State-Dependent Pricing ∗ , 2000 .

[2]  M. Bergen,et al.  The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains , 1997 .

[3]  M. Slade.  Optimal Pricing with Costly Adjustment: Evidence from Retail-Grocery Prices , 1998 .

[4]  Victor Aguirregabiria.  THE DYNAMICS OF MARKUPS AND INVENTORIES IN RETAILING FIRMS , 1999 .

[5]  Andrew Caplin,et al.  State-Dependent Pricing and the Dynamics of Money and Output , 1991 .

[6]  Robert J. Barro,et al.  A Theory of Monopolistic Price Adjustment , 1972 .

[7]  D. Carlton,et al.  The Rigidity of Prices , 1986 .

[8]  Nancy L. Stokey,et al.  Recursive methods in economic dynamics , 1989 .

[9]  J. Heckman,et al.  A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data , 1984 .

[10]  Robert G. King,et al.  State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output , 1999 .

[11]  N. Gregory Mankiw,et al.  Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly , 1985 .

[12]  Stephen G. Cecchetti.  The frequency of price adjustment: A study of the newsstand prices of magazines , 1986 .

[13]  Russell Cooper,et al.  Machine Replacement and the Business Cycle: Lumps and Bumps , 1995 .

[14]  A. Kashyap,et al.  Sticky Prices: New Evidence from Retail Catalogs , 1994 .

[15]  Jonathan L. Willis.  Magazine Prices Revisited , 2001 .

[16]  John Rust.  Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher , 1987 .

[17]  Eytan Sheshinski,et al.  Inflation and Costs of Price Adjustment , 1977 .

[18]  George Tauchen,et al.  Finite state markov-chain approximations to univariate and vector autoregressions , 1986 .

[19]  Olivier J. Blanchard,et al.  Monopolistic Competition and the Effects of Aggregate Demand , 1987 .

[20]  Charles P. Himmelberg,et al.  Evidence on the role of cash flow for investment , 1995 .