Menu Costs and Dynamic Duopoly

Kano, Kazuko (2011): Menu Costs and Dynamic Duopoly.

Abstract

Scrutinizing a state-dependent pricing model in the presence of menu costs and dynamic duopolistic interactions, this paper claims that the assumption about market structure is crucial for identifying menu costs for price changes. Prices in a dynamic duopoly market can be more rigid than those in more competitive markets such as monopolistically competitive one. If so, estimates of menu costs under monopolistic competitions are potentially biased upwards due to the price rigidity from strategic interactions between dynamic duopoly rms. Developing and estimating a dynamic discrete-choice model with duopoly to correct this potential bias, this paper provides empirical evidence that not only menu costs but also dynamic strategic interactions play an important role to explain the observed degree of price rigidity in data of weekly retail prices.

• Item Type: MPRA Paper
• Language: English
• Keywords: Menu Cost; Dynamic Discrete Choice Game; Retail Price
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; L - Industrial Organization > L8 - Industry Studies: Services > L81 - Retail and Wholesale Trade ; e-Commerce; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection

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