Inflation and Price Setting in a Natural Experiment

We analyze the behaviour of prices using a large disaggregated data set for Poland during transition from a planned to a market economy. The size of price changes and the frequency of adjustment both fall as the inflation rate declines. Price setters follow a mixture of state- and time-contingent policies. We find that price setters are forward-looking. Intermarket price variability increases with inflation and the effect of expected inflation is much stronger than the effect of unexpected inflation. So the bottom line is this: it takes sellers of sausage, eggs, toothpaste, vacuum cleaners, car-wash operators etc. just a few years to figure out how to adjust prices in a market environment. Our results support both the menu cost, and the rational expectations, hypotheses.

Regular adjustment: theory and evidence

We ask why, in many circumstances and many environments, decision-makers choose to act on a time-regular basis (e.g. adjust every six weeks) or on a stateregular basis (e.g. set prices ending in a 9), even though such an approach appears suboptimal. The paper attributes regular behaviour to adjustment cost heterogeneity. We show that, given the cost heterogeneity, the likelihood of adopting regular policies depends on the shape of the benefit function: the flatter it is, the more likely, ceteris paribus, is regular adjustment. We provide sufficient conditions under which, when policymakers differ with respect to the shape of the benefit function (as in Konieczny and Skrzypacz, 2006), the frequency of adjustments across markets is negatively correlated with the incidence of regular adjustments. On the other hand, if policymakers differences are due to the level of adjustment costs (as in Dotsey, King and Wolman, 1999), then the correlation is positive. To test the model we apply it to optimal pricing policies. We use a large Austrian data set, which consists of the direct price information collected by the statistical office and covers 80% of the CPI over eight years. We run cross-sectional tests, regressing the proportion of attractive prices and, separately, the excess proportion of price changes at the beginning of a year and at the beginning of a quarter, on various conditional frequencies of adjustment, inflation and its variability, dummies for good types, and other relevant variables. We find that the lower is, in a given market, the conditional frequency of price changes, the higher is the incidence of time- and state-regular adjustment. JEL Classification: E31, L11, E52, D01attractive prices, menu costs, Optimal pricing

Menu Costs, Entry Deterrence, and Nominal Rigidity.

This paper studies, in a model of entry deterrence, conditions under which a small cost of changing nominal prices combined with a real rigidity leads to a large nominal rigidity. The entry deterrence environment, which generates the real rigidity, provides an appealing explanation as to why firms sometimes react to shocks by changing output instead of prices. As in Ball and Romer (1990), a large nominal rigidity arises with some parameter values; it is not, however, monotonically increasing as real prices become more rigid. The paper studies, in a model of entry deterrence, conditions under which a small cost of changing nominal prices combined with a real rigidity leads to a large nominal rigidity. The entry deterrence environment, which generates the real rigidity, provides an appealing explanation as to why firms sometimes react to shocks by changing output instead of prices. As in Ball and Romer (1990), a large nominal rigidity arises with some parameter values; it is not, however, monotonically increasing as real prices become more rigid.

Discussion of: Lumpy Price Adjustments: A Microeconometric Analysis

Discussion of: Lumpy Price Adjustments: A Microeconometric Analysis by Emmanuel Dhyne, Catherine Fuss, Hashem Pesaran and Patrick Sevestre, National Bank of Belgium International Conference on \"Price and Wage Rigidities in an Open Economy\", Brussels, October 12, 2006.Costly Price Adjustment, Optimal Pricing

Inflation, Output and Labour Productivity When Prices Are Changed Infrequently.

When prices are changed infrequently, the effect of inflation on output depends on the form of profit and demand functions. This paper provides a general taxonomy. At small inflation rates, output falls (rises; stays the same) if the demand function is concave (convex; linear) in terms of the log of real price. This holds when the frequency of price changes is fixed (in case of a catalogue firm) as well as when it is chosen optimally (in case of a menu cost firm), with fixed and variable price adjustments costs. With some specifications, inflation increases output, but reduces labor productivity. Copyright 1990 by The London School of Economics and Political Science.

THE BEHAVIOR OF PRICE DISPERSION IN A NATURAL EXPERIMENT

Abstract We study the behavior of prices in Poland following the big-bang market reforms in 1990, using a large, disaggregated data set. Price differences within and across regions are initially large but fall rapidly in the early stages of transition. For most goods, the rapid decline ends within a year. Dispersion is low for goods which are expensive, are bought frequently, constitute a large portion of household expenditures, and in markets characterized by intensive search for the best price. Inflation and inflation variability explain only part of the changes of price dispersion over time. The behavior of price dispersion is consistent with search for the best price and arbitrage. Overall, prices behave as economic theory predicts they would

Inflation and Costly Price Adjustment: A Study of Canadian Newspaper Prices

The paper studies the effect of inflation on price behaviour using price data from Canadian daily newspapers. We test the Sheshinski and Weiss (1977) monopoly price adjustment model on a sample of monopolistic as well as oligopolistic newspapers, in contrast to earlier studies that used data from oligopolistic or monopolistically competitive markets. The results depend crucially on the assumptions about how often the firm collects information and revises its optimal pricing policy. With infrequent policy revisions, the results for monopoly newspapers support the model. The results for oligopoly newspapers are similar.