Institutional Affiliation: University of Pennsylvania
|(Q,S,s) Pricing Rules|
with : w19094
We study the effect of menu costs on the pricing behavior of sellers and on the cross-sectional distribution of prices in the search-theoretic model of imperfect competition of Burdett and Judd (1983). We find that, when menu costs are small, the equilibrium is such that sellers follow a (Q,S,s) pricing rule. According to a (Q,S,s) rule, a seller lets inflation erode the real value of its nominal price until it reaches some point s. Then, the seller pays the menu cost and changes its nominal price so that the real value of the new price is randomly drawn from a distribution with support [S,Q], where Q is the buyer's reservation price and S is some price between s and Q. Only when the menu cost is relatively large, the equilibrium is such that sellers follow a standard (S,s) pricing rule. W...
Published: Kenneth Burdett & Guido Menzio, 2018. "The (Q,S,s) Pricing Rule," The Review of Economic Studies, vol 85(2), pages 892-928. citation courtesy of