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Menu Costs and Dynamic Duopoly

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  • Kazuko Kano

Abstract

Examining a state-dependent pricing model in the presence of menu costs and dynamic duopolistic interactions, this paper claims that the assumption regarding market structure is crucial for iden- tifying the menu costs for price changes. Prices in a dynamic duopolistic market can be more rigid than those in more competitive markets, such as a monopolistic-competition market. Therefore, the estimates of menu costs under monopolistic competition are potentially biased upward due to the price rigidity from strategic interactions between dynamic duopolistic firms. By developing and estimating a dynamic discrete-choice model with duopoly to correct for this potential bias, this paper provides empirical evidence that dynamic strategic interactions, as well as menu costs, play an important role in explaining the observed degree of price rigidity in weekly retail prices.

Suggested Citation

  • Kazuko Kano, 2012. "Menu Costs and Dynamic Duopoly," Global COE Hi-Stat Discussion Paper Series gd12-263, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hst:ghsdps:gd12-263
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    Cited by:

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    2. Brent, Neiman, 2011. "A state-dependent model of intermediate goods pricing," Journal of International Economics, Elsevier, vol. 85(1), pages 1-13, September.
    3. Victor Aguirregabiria & Mathieu Marcoux, 2021. "Imposing equilibrium restrictions in the estimation of dynamic discrete games," Quantitative Economics, Econometric Society, vol. 12(4), pages 1223-1271, November.
    4. Frache, Serafin & Lluberas, Rodrigo & Turen, Javier, 2024. "Belief-dependent pricing decisions," Economic Modelling, Elsevier, vol. 132(C).
    5. Victor Aguirregabiria & Allan Collard-Wexler & Stephen P. Ryan, 2021. "Dynamic Games in Empirical Industrial Organization," NBER Working Papers 29291, National Bureau of Economic Research, Inc.
    6. Aguirregabiria, Victor & Gu, Jiaying & Luo, Yao, 2021. "Sufficient statistics for unobserved heterogeneity in structural dynamic logit models," Journal of Econometrics, Elsevier, vol. 223(2), pages 280-311.
    7. Kano, Kazuko & Kano, Takashi, 2021. "Welfare Costs of Exchange Rate Fluctuations: Evidence from the 1972 Okinawa Reversion," Discussion paper series HIAS-E-114, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    8. Victor Aguirregabiria & Margaret Slade, 2017. "Empirical models of firms and industries," Canadian Journal of Economics, Canadian Economics Association, vol. 50(5), pages 1445-1488, December.
    9. Chen, Jing & Dong, Ming & Rong, Ying & Yang, Liang, 2018. "Dynamic pricing for deteriorating products with menu cost," Omega, Elsevier, vol. 75(C), pages 13-26.
    10. Kazuko Kano, 2018. "Consumer Inventory and Demand for Storable Goods: New Evidence from a Consumer Survey," The Japanese Economic Review, Springer, vol. 69(3), pages 284-305, September.
    11. Simon Mongey, 2017. "Market Structure and Monetary Non-Neutrality," 2017 Meeting Papers 184, Society for Economic Dynamics.

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    More about this item

    Keywords

    Menu Costs; Dynamic Discrete Choice Game; Retail Price;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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