Pricing Behaviour and Menu Costs in Multi-product Firms
New paper titled "Pricing Behaviour and Menu Costs in Multi-product Firms" by Wilko Letterie (Maastricht University) and Øivind A. Nilsen (Norwegian School of Economics) has been published in Economica.
Knowledge concerning pricing behaviour is crucial to construct models facilitating the analysis of macroeconomics dynamics in general, and especially how monetary shocks affect the real economy. Most of the existing studies in the literature on pricing behaviour focus on price changes in single product firms, but the number of studies focusing on multiproduct firms is increasing. Furthermore, an analysis of the manufacturing industry is of great importance as most macroeconomic models assume the price rigidities stem from this sector. This paper investigates the micro-foundations of pricing behaviour using monthly producer prices for Norwegian multiproduct firms. We find both infrequent and many small price changes together with a high degree of within-firm synchronization. This points at fixed menu costs featuring scope economies, at additional linear and convex price adjustment costs, and at the presence of firm-specific shocks. The structural estimates and a simulation support the view that to understand pricing behaviour and the effectiveness of monetary policy, the analysis of multiproduct firms and a richer price adjustment technology in the intermediate goods sector is valuable. The economies of scope in the pricing technology reduce the extent to which pricing behaviour is state dependent. As a result, it also influences non-neutrality of monetary policy. Altogether, the results reveal the potential benefits of deviating from traditional menu cost models in which only fixed or convex costs are included.