Menu Costs, Multi-Product Firms and Aggregate Fluctuations

Abstract

I employ a large set of scanner price data collected in retail stores and document that (i) although the average magnitude of price changes is large, a substantial number of price changes are small in absolute value; (ii) the distribution of non-zero price changes has fat tails; and (iii) stores tend to adjust prices of goods in narrow product categories simultaneously. I extend the standard menu costs model to a multi-product setting in which firms face economies of scale in the technology of adjusting prices. The model, because of its ability to replicate this additional set of micro-economic facts, can generate aggregate fluctuations much larger than those in standard menu costs economies.

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