The kinked demand curve and price rigidity: Evidence from scanner data

Abstract

We estimate the curvature of the demand curve for a wide range of products. We use an extension of Deaton and Muellbauer's Almost Ideal Demand System and scanner data from a large euro area retailer. We find evidence that the overall price elasticity of demand is higher for price increases than for price decreases. However, the overall degree of curvature is one to two orders of magnitude smaller than the value economists usually impose. This suggests that the shape of the demand curve is unlikely to be the only source of real price rigidity. © The editors of the Scandinavian Journal of Economics 2010.