Following the seminal contributions of Cecchetti (1986) on newspaper prices, Kashyap (1995) on catalog prices (both using US data), and Lach and Tsiddon (1992) on meat and wine prices in Israel, a recent wave of empirical research has provided new evidence on consumer and producer price stickiness at the micro level. Bils and Klenow (2004) and Klenow and Kryvstov (2005) provide studies on consumer prices in the US and Dhyne et al. (2006) give a synthesis of the recent studies carried out for the euro area countries. Studies of producer prices include Alvarez et al. (2006), Cornille and Dossche (2006), Loupias, Heckel and Sevestre (2007) and Sabbatini et al. (2005) among many others.
One of the main conclusions of these studies is the existence of a significant degree of heterogeneity in the degree of price flexibility across different product categories. Some products are characterized by a high frequency of price changes, with outlets reseting their prices almost on a continuous basis (for instance, oil products and perishable goods), whilst other product categories are characterized by a very low frequency of price changes (for instance, in some services). Aucremanne and Dhyne (2004) also document a high degree of heterogeneity in the duration of price spells (and hence in the frequency of price changes) even within relatively homogeneous product categories. Indeed, several studies have shown that the frequency of consumer price changes not only differs across product categories, but also varies across categories of retailers. Hyper and super markets also tend to change their prices more frequently than local corner shops.
These studies are, however, silent as to the reasons for such infrequent price changes. A low frequency of price change has sometimes been taken as evidence of nominal or intrinsic price rigidity, namely price rigidity that is inherent to the price setting mechanism. This ignores the role of extrinsic rigidity in price stickiness, namely the type of price rigidity that is induced by a low degree of volatility of either common or idiosyncratic shocks to the marginal cost and/or the desired mark up. Indeed, infrequent price changes are not necessarily due to high cots of price adjustments (i.e. nominal or intrinsic rigidities). When marginal costs and other market conditions do not vary, firms have little or no incentive to change their prices.
In this paper, we aim at identifying the respective contributions of intrinsic and extrinsic rigidities to the observed price stickiness. For that purpose, we develop a state dependent price'setting model, close in spirit to Cecchetti (1986), that relates price changes to the variations in an unobserved optimal price reflecting common and idiosyncratic movements in marginal costs and/or in the desired mark'up, but where price changes are subject to price adjustment costs. Compared to the existing literature, we argue and show that the frequency of price changes may be a poor indicator of intrinsic price rigidities. Our estimates reveal that the scarcity of price changes for some services in particular originates essentially from extrinsic rigidities rather than from high intrinsic rigidities.
The outline of the rest of the paper is as follows. We first present the theoretical model in Section 2. We then discuss the estimation procedure in Section 3. Section 4 describes the micro price data sets used and presents the estimation results. Section 5 concludes.
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Lumpy Price Adjustments: A Microeconometric Analysis
