Working Paper: NBER ID: w22506
Authors: Craig Benedict; Mario J. Crucini; Anthony Landry
Abstract: In this paper, we argue that differences in the cost structure across sectors play an important role in the decision of firms to adjust their prices. We develop a menu-cost model of pricing in which retail firms intermediate trade between producers and consumers. An important facet of our analysis is that the labor-cost share of retail production differs across goods and services in the consumption basket. For example, the price of gasoline at the retail pump is predicted to adjust more frequently and by more than the price of a haircut due to the high volatility in wholesale gasoline prices relative to the wages of unskilled labor, even when both retailers face a common menu cost. This modeling approach allows us to account for some of the cross-sectional differences observed in the frequency of price adjustments across goods. We apply this model to Ecuador to take advantage of inflation variations and the rich panel of monthly retail prices.
Keywords: price adjustment; menu costs; Ecuador; inflation; cost structure
JEL Codes: E3; E58; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cost structures (L11) | frequency of price adjustments (E30) |
| higher labor-cost share (J39) | less frequent price adjustments (D49) |
| volatile traded inputs (C67) | more frequent price adjustments (D49) |
| gasoline price volatility (Q31) | frequency of price adjustments (E30) |
| traded goods (F19) | more frequent price adjustments (D49) |
| price adjustments (L11) | monetary policy predictions (E52) |