Magazine Prices
Revisited
By Jonathan L. Willis
December 2001
RWP 01-15
Research Division
Federal Reserve Bank of Kansas City
Abstract
This paper examines price adjustment behavior in the magazine industry. In a frequently cited study, Cecchetti (1986) constructs a reduced-form (S,s) model for firms. Cecchetti assumes that a firm's pricing rules are fixed for non-overlapping three-year intervals and estimates the model using a conditional logit specification from Chamberlain (1980). The estimates are inconsistent, however, due to the state-dependent specification of the model. I illustrate the econometric problems in Cecchetti's results through a Monte Carlo exercise and then suggest a method for producing consistent estimates based upon Heckman and Singer (1984). The corrected results provide strong support for models of state-dependent pricing.
Keywords: Menu costs, price adjustment, nonparametric methods
JEL Codes: C14, D40, and L16
Jonathan L. Willis is an economist at the Federal Reserve Bank of Kansas City. This paper is a revised version of the first chapter of the author’s Ph.D. dissertation. The author would like to thank Russell Cooper for detailed discussions regarding problems of unobserved heterogeneity and state dependence and Stephen Cecchetti for providing the magazine data. Kent Kovacs provided excellent research assistance. The views expressed in this paper are solely those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System.
jonathan.willis@kc.frb.org