Structural estimation of price adjustment costs in the European car market

This paper characterizes the price adjustment costs that are consistent with observed price dynamics in the European car market. We estimate a dynamic model of international multi-product firms that set prices in different currencies while facing price adjustment costs. We find that large price adjustment costs are not needed to rationalize the substantial degree of price inertia we observe in the data. Intuitively, since GDP, wages and exchange rates exhibit such a large degree of auto correlation, small adjustment costs can explain very persistent prices. Also, accounting for country-specific price sensitivity, wages, GDP and exchange rates, the price adjustment costs should differ substantially across producers and markets to match the data. (C) 2016 Elsevier B.V. All rights reserved.