TY - JOUR

T1 - Frequent price changes under menu costs

AU - Hansen, Per Svejstrup

N1 - JEL Classification: E31, E52

PY - 1999

Y1 - 1999

N2 - This paper investigates the effect of uncertainty on a single firm's pricing behaviour in a dynamic menu cost model that results in (S,s)-rules where the price is fixed inside a band. It will be demonstrated that even though the band of inaction widens in response to increased uncertainty, the price may be changed more frequent in the short run, and in the long run it definitely will. Hence, observing frequent price changes is not necessarily inconsistent with a firm operating under menu costs. This paper relies on an article by Dixit (1991), (Review of Economic studies, 58, 141-151), but it offers a different solution technique. In particular, the solution of the model will be derived explicitly, unlike Dixit where approximations are resorted to

AB - This paper investigates the effect of uncertainty on a single firm's pricing behaviour in a dynamic menu cost model that results in (S,s)-rules where the price is fixed inside a band. It will be demonstrated that even though the band of inaction widens in response to increased uncertainty, the price may be changed more frequent in the short run, and in the long run it definitely will. Hence, observing frequent price changes is not necessarily inconsistent with a firm operating under menu costs. This paper relies on an article by Dixit (1991), (Review of Economic studies, 58, 141-151), but it offers a different solution technique. In particular, the solution of the model will be derived explicitly, unlike Dixit where approximations are resorted to

U2 - 10.1016/S0165-1889(98)00051-7

DO - 10.1016/S0165-1889(98)00051-7

M3 - Journal article

VL - 23

SP - 1065

EP - 1076

JO - Journal of Economic Dynamics and Control

JF - Journal of Economic Dynamics and Control

SN - 0165-1889

IS - 7

ER -