Menu Costs and Dynamic Duopoly

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

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 identifying 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.

• 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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