The concept of menu cost indicates that firms are facing a fixed menu cost when they want to change the nominal prices. However, the standard menu cost model is hardly to explain the observed facts from micro-level data, especially in terms of sales. In this paper, we investigate the effect of sales through a novel product-level dataset. There are at least three findings from our estimation results. First, we find that retail sales themselves, rather than price decreases, have a large effect on consumers’ purchases. Second, consumers are more prices sensitive when the product is on sale than they are when the product is not on sale. Third, consumers are far more aware of price decreases than price increases.
Shocks vs Menu Costs: Patterns of Price Rigidity in an Estimated Multi-Sector Menu-Cost Model
