On What States Do Prices Depend? Answers from Ecuador

26 Pages Posted: 16 Aug 2016 Last revised: 1 Jul 2023

See all articles by Craig Benedict

Craig Benedict

State University of New York (SUNY) - State University of New York (SUNY) at Oswego

Mario J. Crucini

Vanderbilt University - College of Arts and Science - Department of Economics; National Bureau of Economic Research (NBER)

Anthony Landry

Government of Canada - Bank of Canada

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Date Written: August 2016

Abstract

In this paper, we argue that differences in the cost structure across sectors play an important role in the decision of firms to adjust their prices. We develop a menu-cost model of pricing in which retail firms intermediate trade between producers and consumers. An important facet of our analysis is that the labor-cost share of retail production differs across goods and services in the consumption basket. For example, the price of gasoline at the retail pump is predicted to adjust more frequently and by more than the price of a haircut due to the high volatility in wholesale gasoline prices relative to the wages of unskilled labor, even when both retailers face a common menu cost. This modeling approach allows us to account for some of the cross-sectional differences observed in the frequency of price adjustments across goods. We apply this model to Ecuador to take advantage of inflation variations and the rich panel of monthly retail prices.

Suggested Citation

Benedict, Craig and Crucini, Mario J. and Landry, Anthony, On What States Do Prices Depend? Answers from Ecuador (August 2016). NBER Working Paper No. w22506, Available at SSRN: https://ssrn.com/abstract=2823314

Craig Benedict (Contact Author)

State University of New York (SUNY) - State University of New York (SUNY) at Oswego ( email )

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Mario J. Crucini

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

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HOME PAGE: http://my.vanderbilt.edu/mariocrucini/about-me/

National Bureau of Economic Research (NBER) ( email )

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Anthony Landry

Government of Canada - Bank of Canada ( email )

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