Choosing Between Time and State Dependence: Micro Evidence on Firms' Price-Reviewing Strategies

38 Pages Posted: 6 Mar 2011

See all articles by Daniel A. Dias

Daniel A. Dias

University of Illinois at Urbana-Champaign - Department of Economics; Technical University of Lisbon (UTL) - Centre for Applied Mathematics and Economics (CEMAPRE)

Carlos Robalo Marques

Bank of Portugal - Economic Research Department

Fernando Martins

Bank of Portugal - Research Department; University of Lisbon - School of Economics and Management; Universidade Lusíada, Lisboa

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Date Written: February 18, 2011

Abstract

Thanks to recent findings based on survey data, it is now well known that firms differ from each other with respect to their price-reviewing strategies. While some firms review their prices at fixed intervals of time, others prefer to perform price revisions in response to changes in economic conditions. In order to explain this fact, some theories have been suggested in the literature. However, empirical evidence on the relative importance of the factors determining firms’ different strategies is virtually nonexistent. This paper contributes to filling this gap by investigating the factors that explain why firms follow time-, state- or time- and state-dependent price-reviewing rules. We find that firms’ strategies vary with firm characteristics that have a bearing on the importance of information costs, the variability of the optimal price and the sensitivity of profits to non-optimal prices. Menu costs, however, do not seem to play a significant role.

Keywords: Survey data, price stickiness, menu costs, information costs, multinomial probit

JEL Classification: C41, D40, E31

Suggested Citation

Dias, Daniel A. and Robalo Marques, Carlos and Martins, Fernando, Choosing Between Time and State Dependence: Micro Evidence on Firms' Price-Reviewing Strategies (February 18, 2011). ECB Working Paper No. 1305, Available at SSRN: https://ssrn.com/abstract=1763816

Daniel A. Dias (Contact Author)

University of Illinois at Urbana-Champaign - Department of Economics ( email )

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Carlos Robalo Marques

Bank of Portugal - Economic Research Department ( email )

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Fernando Martins

Bank of Portugal - Research Department ( email )

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University of Lisbon - School of Economics and Management ( email )

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Universidade Lusíada, Lisboa ( email )

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