VARIABLE PRICE ADJUSTMENT COSTS

The fixed (menu) cost approach has been criticized since administrativ e costs of price changes are small. This paper studies costs which dep end on (i) the size or (ii) the frequency of adjustment. The optimal p ricing policy is similar to that in the menu cost model which is, ther efore, a simple benchmark case. While recent empirical evidence implie s rejection of the fixed cost model, it is consistent with the general specification used here. The analysis strongly suggests that nominal inflexibilities at the individual level are not due to administrative costs but result from unfavourable market response to price changes.