Menu costs and asymmetric price adjustment
Abstract
We study optimal price setting by a monopolist in an infinite horizon model with stochastic costs, moderate inflation, and costly price adjustment. For realistic parameters, chosen to generate observed frequencies of price changes, the model can account for several aggregate regularities. In particular, price reductions are larger but less frequent than price increases, and prices respond considerably faster to cost increases than to cost decreases. The latter asymmetry is more pronounced when input prices are less volatile, as documented by Pelzman (2000).
Fields of Study & Subjects
Economics of Agriculture and Food Markets
Merger and Competition Analysis
Consumer Market Behavior and Pricing
Publication details
- Journal / source
- International Journal of Industrial Organization
- Publisher
- Elsevier BV
- Volume
- 105
- Pages
- 103259–103259
- Publication date
- 18 January 2026
- Language
- EN