state dependent pricing and the dynamics of money and output standard macroeconomic models of price stickiness assume that each firm leaves its price unchanged for a fixed amount of time we present an alternative model in which the pricing decision depends on the state of the economy we find a method of aggregating individual price changes that allows a simple characterization of macroeconomic variables the model produces a positive money output correlation and an empirical phillips curve in addition the impact of monetary shocks depends crucially on the current level of output which points to a natural connection between state dependent microeconomics and state dependent macroeconomics i introduction there is a long tradition in macroeconomics of attributing the real effects of nominal demand shocks to nominal price stickiness in this view if there is no change in prices when nominal demand rises then quantities must bear the burden of adjustment hence nominal price rigidity provides the friction needed for nominal demand shocks to be transmitted to the real economy standard models of this transmission mechanism such as fischer 1977 and taylor 1980 are based on the assumption that each firm leaves its price unchanged for a fixed amount of time the main reason for considering such time dependent pricing rules is their analytic tractability constraining firms to adjust their prices at prespecified times both simplifies the derivation of equilibrium strategies and allows the use of powerful time series techniques to analyze aggregate dynamics the main disadvantage of the timedependent approach is that between price adjustments firms are not allowed to respond even to extreme changes of circumstance this makes it difficult to know whether the qualitative effects of money in these models are the result of nominal rigidities per se or of the exogenously imposed pattern of price changes an alternative approach to modeling price stickiness is to allow the price setting decision to depend on the actual state of the

investments holdup and the form of market contracts the authors analyze incomplete contracts to induce efficient investment with exogenous switching costs fixed price contracts are efficient generate some rigidity in prices are renegotiated intermittently by possibly small amounts and when inflation is positive generate asymmetric responses to shocks all consistent with evidence on prices and wages with two sided specific investments efficiency requires prices to have sufficient escalator clauses to avoid renegotiation as observed in many long term contracts a third case with one sided specific investments can generate take or pay contracts and explain why firms sometimes pay for specific investments that appear to benefit employees directly

product market competition and the industry price cost markup fluctuations abstract we examine the role played by imperfect competition in the response of markups to energy price and monetary changes we find i for concentrated industries markups increase with monetary expansion and decrease when energy prices increase the elasticity with respect to energy prices is greater than monetary changes ii for low concentration industries markups are virtually unaffected by monetary changes and the energy price elasticities are statistically insignificant iii markups are procyclical over the industry specific cycle and iv increased import competition lowers markups only in the concentrated industries the energy price increases decreases during the 1970s 1980s may have been a key factor contributing to the narrowing widening of the markup gap between high and low concentration industries we provide evidence that procyclical markups in concentrated industries are not being driven by differences in the degree of labor hoarding between low and high concentration industries

the timing and magnitude of retail store markdowns evidence from weekends and holidays we examine daily prices of eight goods at seventeen retail stores collected in ann arbor michigan over a four month period from november 1 to february 28 we focus on weekly and seasonal price patterns and on the frequency of price markdowns or sales there were frequent markdowns in the intensive shopping period prior to christmas and a tendency for such sales to occur on weekends we interpret these findings as evidence that a significant number of markdowns are timed to occur when shopping intensity is exogenously high we complement the imperfect information based motives for sales in the literature by contributing an additional element based on the role of bulk shopping and increasing returns in the shopping technology

can more frequent price changes lead to price inertia nonneutralities in a state dependent pricing context the authors present a generalized s s state dependent pricing model in which menus are changed not just in response to price misalignment but also in response to factors such as changing product mix their model generates aggregate price inertia and so reverses an important earlier result on neutrality in state dependent pricing contexts in more general settings than previous modifications it also provides a compromise between state and time dependent rules gives a glimpse at the dynamic implications of menu cost models and reproduces two recent results one on phillips curve slopes and one on asymmetric fluctuations copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

profit margins and the business cycle evidence from uk manufacturing firms this paper presents some empirical models of profitability using panel data covering 709 large u k companies ove r the 1970s and 1980s focusing specifically on the role of aggregate demand shocks in shaping firm level profitability in basic regressi ons and in quite complex econometric models the results suggest that firm level profit margins fell heavily during the deep manufacturing recession of the early 1980s and as such are consistent with model s predicting the procyclical nature of profit margins this result hol ds across different product groups producer goods consumer durables a nd nondurables though the timing of the impact of aggregate shocks appears to differ copyright 1993 by blackwell publishing ltd

customer markets credit market imperfections and real price rigidity according to standard theory an increase in demand should raise prices of goods given factor prices empirically however prices appear to be unaffected by short run variations in demand this paper suggests an explanation of this observation if customers react slowly to price changes and credit markets are imperfect prices may be unchanged or even fall when demand increases the reason is that when demand is high profits are high and firms can compete more intensely for customers without increasing their borrowing copyright 1991 by the london school of economics and political science

analysing success of regulatory policy transfers evidence from turkish energy markets abstract economic regulation of public utilities has become a worldwide phenomenon with the preceding privatisation stream it is questionable to transfer regulatory models hastily without customising the policy options or introducing necessary institutional reforms enabling the achievement of expected results of regulatory reform institutional configuration of a country affects credibility of regulatory commitments quality of regulatory design and way of policy transfer turkey s energy market regulation experience confirms the decisive role of institutions in shaping the regulatory framework

testing static oligopoly models conduct and cost in the sugar industry 1890 1914 we explore the widespread methodology of using demand information to infer market conduct and unobserved cost components under the hypothesis of static oligopoly behavior direct measures of marginal cost and conduct indicating small market power serve as benchmarks the more competitive models yield better cost estimates the best cost estimates occur when conduct is estimated as a free parameter which in turn only slightly underestimates our direct measure it also tracks the decline in market power accompanying the industry s structural changes the methodology is largely validated although partial cost information can improve its predictive power conclusions are robust to demand function

menu costs and the neutrality of money a model of endogenous price adjustment under money growth is presented firms follow s s pricing policies and price revisions are imperfectly synchronized in the aggregate price stickiness disappears and money is neutral the connection between firm price adjustment and relative price variability in the presence of monetary growth is also investigated the results contrast with those obtained in models with exogenous fixed timing of price adjustment

divestiture requirements as a tool for competition policy a case from the swedish beer market we investigate the effect of divestitures on prices and welfare following the carlsberg pripps merger in the swedish beer market both difference in difference estimation and simulations using a random coefficients logit model suggest that divestitures are important for dampening price increases prices of divested brands fall by around 3 and the predicted price increase for carlsberg falls from 3 to 1 6 as a result of the divestitures to guide practice on divestitures we investigate the role of the recipient and the number and characteristics of the divested products by simulating post merger outcomes for all relevant cases we find that in this setting with large multiproduct firms the competition authority s most effective means to dampen adverse post merger outcomes are to aim for a small recipient firm and attain a large number of divested products enforcing larger divestitures in terms of market share and raising the average cross price elasticity between the merging parties divested and retained products strengthen the dampening effect further

social acceptance of renewable energy innovation an introduction to the concept this paper introduces the special issue on social acceptance of renewable energy innovation it is a collection of best papers presented at an international research conference held in tramelan switzerland in february 2006 while there are ambitious government targets to increase the share of renewable energy in many countries it is increasingly recognized that social acceptance may be a constraining factor in achieving this target this is particularly apparent in the case of wind energy which has become a subject of contested debates in several countries largely due to its visual impact on landscapes this paper introduces three dimensions of social acceptance namely socio political community and market acceptance factors influencing socio political and community acceptance are increasingly recognized as being important for understanding the apparent contradictions between general public support for renewable energy innovation and the difficult realization of specific projects the third dimension market acceptance has received less attention so far and provides opportunities for further research particularly from management scholars

business cycles and the relationship between concentration and price cost margins using a newly constructed panel data base we examine changes in price cost margins in 284 manufacturing industries between 1958 and 1981 a key finding is a dramatic narrowing of the spread between the margins of concentrated and unconcentrated industries over this period we provide evidence that this narrowing is a result of the greater sensitivity of price cost margins in more concentrated industries to demand fluctuations this finding is robust to the inclusion of other industry variables and to measures of import competition the results indicate that cross sectional estimates of the concentration margins relationship are likely to be both biased and misleading

sticky prices new evidence from retail catalogs this paper presents new results on the size frequency and synchronization of price changes for twelve selected retail goods over the past 35 years three basic facts about the data are uncovered first nominal prices are typically fixed for more than one year although the time between changes is very irregular second prices change more often during periods of high overall inflation third when prices do change the sizes of the changes are widely dispersed both large and small changes occur for the same item and the sizes of these changes do not closely depend on overall inflation

price adjustments by a gasoline retail chain we use daily data to examine price responses in the swedish gasoline market to changes in the rotterdam spot price exchange rates and taxes the distribution of price adjustments by a leading retail chain for the period january 1980 to december 1996 is symmetric with no small adjustments an error correction model shows that in the short run prices gradually move towards the long run equilibrium in response to cost shocks there is some evidence that also in the short run prices are stickier downwards than upwards prices respond more rapidly to exchange rate movements than to the spot market price our analysis emphasizes that to fully understand price adjustments it is necessary to examine data sets where the sample frequency at least matches that of price adjustments

underemployment equilibrium with rational expectations in this paper i use some recent work in the microeconomics of imperfect information to construct a macro model the microeconomic theory suggests that atomistically competitive firms face kinked demand curves in this model there is a range of aggregate equilibria consistent with correct information i then show that individual firms can face a free rider problem in trying to move from one equilibrium to another by changing the price level monetary policy is not subject to this problem even if the policy is fully anticipated

intermediate goods and business cycles implications for productivity and welfare this paper presents an aggregate demand driven model of business cycles that provides a new explanation for the procyclicality of productivity and simultaneously predicts large welfare losses from monetary nonneutrality the key features of the model are an input output production structure imperfect competition countercyclical markups and for some results state dependent price rigidity true technical efficiency is procyclical even though production takes place with constant returns without technology shocks or technological externalities the paper has observable implications that distinguish it empirically from related work these implications are generally supported by data from u s manufacturing industries copyright 1995 by american economic association

optimal pricing with costly adjustment evidence from retail grocery prices in many theoretical models it is assumed that there are costs associated with adjusting prices in this paper the existence type and magnitude of such costs are investigated empirically a discrete choice dynamic programming model that nests fixed and variable costs is developed and econometric estimates of the adjustment cost function are obtained the data used to implement the model consist of weekly retail prices and sales of three brands of saltine crackers sold by four chains of grocery stores in a small u s town the study has several distinguishing characteristics first the data are highly disaggregate at the level of brand and store second variables are sampled at weekly intervals third the model nests fixed and variable adjustment costs and can therefore determine their relative importance finally the discrete choice model is both structural and dynamic

the magnitude of menu costs direct evidence from large u s supermarket chains we use store level data to document the exact process of changing prices and to directly measure menu costs at five multistore supermarket chains we show that changing prices in these establishments is a complex process requiring dozens of steps and a nontrivial amount of resources the menu costs average 105 887 year per store comprising 0 70 percent of revenues 35 2 percent of net margins and 0 52 price change these menu costs may be forming a barrier to price changes specifically 1 a supermarket chain facing higher menu costs due to item pricing laws that require a separate price tag on each item changes prices two and one half times less frequently than the other four chains 2 within this chain the prices of products exempt from the law are changed over three times more frequently than the products subject to the law in principle fixed costs of changing prices can be observed and measured in practice such costs take disparate forms in different firms and we have no data on their magnitude so the theory can be tested at best indirectly at worst not at all alan blinder 1991 p 90

transferability of demand side policies between countries abstract the development of methods to determine the transferability of policies between countries has received limited attention in the energy policy field previous research has focussed on theoretical or less formal determinants of energy policy transferability rather than providing practical analytical tools the paper presents a practical framework for analysing the transferability of demand side management dsm policies and to identify where policies are transferable at different levels of policy transfer the paper tests the framework to determine the transferability of different types of dsm policy across 30 countries and 36 sub national states the method is a contextual based analysis that matches up countries states that have a comparable context at the proposed three levels of policy transfer direct copying adaptation and inspiration the paper utilises multi criteria decision making analysis with 17 dsm experts to validate the breakdown of contextual factors at different levels of policy transfer four groups of countries are identified where policy transfer is possible at the adaptation level and seven groups of countries states are identified at the inspiration level overall the paper argues that context is key and the level of contextual detail included in methods to analyse energy policy transferability will affect the level of policy transfer that is appropriate

aggregation and optimization with state dependent pricing the literature on the aggregation of s s policies has ignored the impact of aggregate behavior on the individual s optimization problem in the case of pricing the feedback effects are clear not only do pricing strategies determine the evolution of the price level but the evolution of the price level also influences the optimal pricing strategies in this paper we provide a consistent treatment of aggregation and optimization we use this model to analyze three issues in the menu cost pricing literature the relationship between strategic complementarity and the real effects of money the relationship between the variance of the money supply and the correlation between money and output and the relationship between the cost of price adjustment and the size of price adjustment questions concerning the dynamics of aggregate variables such as prices employment investment and consumption represent the core of business cycle analysis one striking feature of these variables is the radical difference between properties of these aggregates and the nature of the individual behavior that underlies them the behavior of a firm s prices investment and employment and the behavior of an individual s consumption all involve frictional elements that lead to discrete adjustment at the microeconomic level heterogeneity among individuals however tends to smooth the behavior of the corresponding aggregates in recent years a large body of research has developed to examine the manner in which microeconomic frictions influence aggregate dynamics one of the centerpieces of this research has been the s s model developed by arrow harris and marschak 1951 the key element of this model is the state dependence of individual decisions agents act when a state variable crosses some critical threshold which balances the cost and benefits of adjustment the aggregate implications of this form of microeconomic behavior have been analyzed by blinder 1981 caplin 1985 and mosser 1991 in the context of inventory dynamics by caplin and spulber 1987 caballero and engel 1991 1993 and caplin and leahy 1991 in the context of prices and by bertola and caballero 1990 caballero 1993 and eberly 1994 in the context of con sumer durables one of the most limiting aspects of these models is that they focus exclusively on the impact that microeconomic inertia has on aggregate dynamics they 1we would like to thank michael harrison loannis karatzas john leahy sr andreu mas colell a co editor and four anonymous referees for helpful discussions and comments and the national science foundation and the sloan foundation for financial support

heterogeneity in price rigidity evidence from a case study using microlevel data we combine two data sets to study price rigidity the first consists of weekly time series of retail wholesale and spot prices for twelve products these time series contain two exogenous cost shocks we find that prices exhibit more rigidity in response to the second shock than the first the second data set consists of all publicly available information about the shocks content analysis of these information reveals that the first shock is larger and more persistent and the market has more information on it than the second we conclude therefore that prices are more flexible in response to cost shocks that are larger that are more persistent and on which market participants have more information

on the stubbornness of sticky prices this paper presents a simple menu cost example in which there is a clear distinction between price stickiness and downward rigidity of prices while price stickiness may or may not exist in menu cost models downward rigidity shows up whenever there is a reduction of the expected rate of inflation this reduction changes the optimal target and threshold for each firm for some it also implies an immediate increase of their own price this upward jump of prices in case of a disinflationary attempt is interpreted as downward rigidity since there are no symmetric forces when expected inflation increases copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

optimum pricing policy under stochastic inflation we describe aggregate inflation as a stochastic process in which the rate of change of the price level can be positive or zero where the times spent in each state are of random duration this class of processes includes two state markov chains and renewal processes as special cases it is shown that the optimal pricing policy of a monopolistic firm with non convex costs of price adjustment is s s in its real price i e its nominal price relative to the price level a basic certainty equivalence result is proved i e the firm behaves as if it faces a certain and fixed rate of inflation higher than the actual expected rate the difference between the two rates being a risk premium which depends on the real interest rate and the parameters of the stochastic process one can thus apply previous results from the case of certainty sheshinski and weiss review of economic studies 1977 to obtain comparative static results in particular one finds that an increase in the variance of expected inflation leads firms to choose a pricing policy with larger amplitude in real price the paper also addresses the question of consistency in firms expectations when the price level is determined by the firms actions in this paper we consider pricing policies of individual firms in an inflationary environment each firm expects the general price level to increase and must determine the rate of increase of its own price it is assumed that the firm incurs an adjustment cost when it changes its nominal price consequently firms choose to change prices occasionally rather than continuously

microfoundations of macroeconomic price adjustment survey evidence from swedish firms this paper presents the results of a survey on price setting behavior conducted on a large random sample of swedish firms the median firm adjusts the price once a year state and time dependent price setting are about equally important the four highest ranked explanations for price rigidity in this study implicit contracts sluggish costs explicit contracts and the kinked demand curve have close correspondents among the top five places in two similar large scale surveys carried out in the uk and the u s the results point to the importance of the long term relations with customers for the rigidity of prices the estimated share of sales that go to regular customers is more than 80

a review of demand side management policy in the uk abstract demand side management dsm refers to actions undertaken on the demand side of energy metres a broad definition of dsm is proposed to include current policy objectives for emissions reduction energy security and affordability and encompasses energy efficiency demand response and on site back up generation and storage the paper reviews the concept of dsm outlines the historical impacts of dsm globally since the energy crises of the 1970s analyses uk dsm policy and examines the influence of eu directives on uk dsm policy as the country is currently deciding on how to include the demand side in its electricity market reform proposals and wider energy policy much of the focus of previous research has been on dsm technological trials and modelling studies rather than dsm policy and the paper contributes to filling this gap policy recommendations for the uk context are discussed and it is clear that the success of dsm policies is determined primarily by regulatory support and utility financial incentives it is important that policy clarity is provided and that current and new policies do not overlap

small menu costs and large business cycles a macroeconomic model of monopoly i introduction the conflict between modern neoclassical and traditional keynesian theories of the business cycle centers upon the pricing mechanism in neoclassical models prices are fully flexible they represent the continuous optimization of economic agents and the continuous intersection of supply and demand in keynesian models prices are often assumed to be sticky they do not necessarily equilibrate all markets at all times one of the reasons for the resurgence of the equilibrium approach to macroeconomics has been the absence of a theoretical underpinning for this keynesian price stickiness this note shows that sticky prices can be both privately efficient and socially inefficient the business cycle results from the suboptimal adjustment of prices in response to a demand shock to the extent that policy can stabilize aggregate demand it can mitigate the social loss due to this suboptimal adjustment in some keynesian models prices are simply exogenously fixed 2 in others agents must set their prices in advance of the transaction date the act of altering a posted price is certainly costly these costs include such items as printing new catalogs and informing salesmen of the new price yet these menu costs are small and therefore generally perceived as providing only a weak foundation for these fixed price models however this inference is flawed small menu costs can cause large welfare losses the claim that price adjustment costs are small does not rebut the claim that they are central to understanding economic fluctuations

insiders outsiders and nominal wage contracts while the consequences of nominal wage contracts have been rather thoroughly analyzed there is no generally accepted theory of why such contracts prevail in this paper i argue that the distinction between insiders and outsiders is important for understanding nominal wage contracts since most employment fluctuations take the form of fluctuations in hiring insiders are normally not affected by them since prices are primarily determined by costs demand shocks have small effects on real wages thus insiders have little incentive to change to more complicated contracts with rigid nominal wages nominal demand shocks have large effects on the employment opportunities of outsiders but outsiders have little influence on labor contracts