A State-Dependent Model of Intermediate Goods Pricing

Recent analyses of transaction-level datasets have generated new stylized facts on price setting and greatly influenced the empirical macroeconomics literature. This work has uncovered marked heterogeneity in price stickiness, demonstrated that even non-zero price changes do not fully “pass through” cost shocks, and offered evidence of synchronization in the timing of price changes. Further, intrafirm prices have been shown to differ from arm’s length prices in each of these characteristics. This paper develops a state-dependent model of intermediate goods pricing, which allows for arm’s length and intrafirm transactions, and is capable of generating these empirical pricing patterns.