Ruhr Economic Papers

Ruhr Economic Papers #439

Price-Setting Behavior with Menu Costs – Experimental Evidence

by Andreas Orland and Michael W.M. Roos

RUB, 08/2013, 58 S./p., 6 Euro, ISBN 978-3-86788-496-9 DOI: 10.4419/86788496

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Abstract

We experimentally test the price-setting behavior of firms in the Rotemberg (1982) model in order to explain puzzles in the New Keynesian Phillips curve (NKPC). By constructing categories and a quantitative measure that compare behavior with optimum we find heterogeneous price-setting behavior by degree of information acquired about the future. Subjects rarely use past information, but overweight their own past price. We study the impact of heterogeneous price-setting behavior on estimated theoretically derived and hybrid Phillips curves. We find support for features of both NKPCs in our findings at the micro level. But the hybrid NKPC has a superior fit.

JEL-Classification: C91, D92, E52

Keywords: Hybrid Phillips curve; experimental economics; behavioral macroeconomics

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