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Empirical studies of oligopolistic pricing and heterogeneous consumer search
... The theoretical literature has mainly focused on the distribution of list prices across stores whereas our data will be transaction prices and therefore weighted by quantity. Sorensen (1999) has suggested, in a slightly different model, that the maximum dispersion of list prices occurs at very low levels of search costs and that for plausible ranges, reducing search costs reduces dispersion. In our data, we will have transaction prices (i.e., quantity weighted) rather than list prices which is likely to influence this result. ...
Menu cost models have become a main microfoundation of sticky prices in macroeconomics and international economics. Yet, as is perhaps not widely realized, results of empirical tests are mixed. In this paper we develop a simple model with menu costs and search for the best price. Unlike existing studies, which focus on time-series behaviour of prices, the test of our model is based on its cross-sectional implications. We show that the more intensive is the search for the best price in a given market, the smaller and more frequent are price changes. These predictions are tested using a large, disaggregated data set from Poland. The results support the model. We conclude by suggesting a simple explanation for earlier rejections.
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