Economies of scope in price setting: A moment inequalities estimation

Abstract

Using weekly data on prices, costs and units sold by a supermarket chain, a moment inequalities approach is used to estimate a discrete-choice dynamic model of a multiproduct firm facing menu costs. This empirical methodology allows to estimate two types of fixed costs of price adjustment: costs that are independent of the number of items that change prices and costs that are incurred at each item’s price change. I find that both types of menu costs exist and are substantial. The total cost of changing prices is estimated to be bounded between 0.3% and 1.3% of revenues and between 17% and 65% of net margins. The first type of fixed cost accounts for between 23% and 99% of this expense, pointing to substantial economies of scope in price setting.