Lumpy Price Adjustments: A Microeconometric Analysis

Based on a reduced-form state-dependent pricing model with random thresholds, we specify and estimate a nonlinear panel data model with an unobserved factor representing the common cost or demand components of the unobserved optimal price. Using this model, we are able to assess the relative importance of common and idiosyncratic shocks in explaining the frequency and magnitude of price changes in the case of a wide variety of consumer products in Belgium and France. We find that the mean level and variability of the random thresholds are key for explaining differences across products in the frequency of price changes. We also find that the idiosyncratic shocks represent the most important driver of the magnitude of price changes. Supplementary materials for this article are available online.