Wednesday, April 6, 2011
Posted by D. Daniel Sokol
Saroj Bhattarai (Penn State Econ) and Raphael Schoenle (Brandeis Econ) describe Multiproduct firms and price-setting: theory and evidence from U.S. producer prices.
ABSTRACT: In this paper, we establish three new facts about price-setting by multiproduct firms and contribute a model that can explain our findings. Our findings have important implications for real effects of nominal shocks and provide guidance for how to model pricing decisions of firms. On the empirical side, using micro-data on U.S. producer prices, we first show that firms selling more goods adjust their prices more frequently but on average by smaller amounts. Moreover, the higher the number of goods, the lower is the fraction of positive price changes and the more dispersed the distribution of price changes. Second, we document substantial synchronization of price changes within firms across products and show that synchronization plays a dominant role in explaining pricing dynamics. Third, we find that within-firm synchronization of price changes increases as the number of goods increases. On the theoretical side, we prese! nt a state-dependent pricing model where multiproduct firms face both aggregate and idiosyncratic shocks. When we allow for firm-specific menu costs and trend inflation, the model matches the empirical findings.