Pricing behavior of multiproduct firms : evidence from Norwegian PPI Data

Abstract

According to New Keynesian theory, monetary policy works in the short run because of micro level wage and price rigidities. There is broad consensus that nominal price rigidities exist. Enhanced knowledge of the microeconomic mechanisms that generate such rigidities is important as it might improve the design of macroeconomic models, and ultimately the implementation of monetary policy. Although most macroeconomic models assume price setting by single-product firms, most price adjustment decisions are in fact made by multiproduct firms. Therefore, accounting for the multiproduct dimension is of great importance as new insight might have implications for macroeconomic model design. Recently, more researchers have focused on the multiproduct dimension both theoretically and empirically. However, the field still remains largely unexplored. The aim of this thesis is to examine the pricing behavior of multiproduct firms empirically. Using a relatively unexplored dataset on Norwegian PPI data from 2004-2009 we present descriptive statistics on the frequency, size and dispersion of price changes and analyze how these statistics relate to the number of goods produced in a given plant. Furthermore, we apply a discrete choice model for the price adjustment decision at the extensive margin and look for evidence of within-firm synchronization in the timing of price changes. We also look for evidence of scope economies in price adjustment leading to within-firm synchronization. These are our key findings: Firstly, the frequency, size and dispersion in the size of price adjustments appear not to be systematically related to the number of goods produced. Secondly, there is a large degree of within-firm synchronization in the timing of price adjustments. Thirdly, we find in our data only partial support for the hypothesis of a common cost for price adjustments that yields scope economies.