The (Q,S,s) Pricing Rule

We introduce menu costs in the search-theoretic model of imperfect competition of Burdett and Judd. When menu costs are not too large, the equilibrium is such that sellers follow a (Q,S,s) pricing rule. According to the rule, a seller lets inflation erode the real value of its nominal price until it reaches some point |s|⁠. Then, the seller pays the menu cost and resets the real value of its nominal price to a point randomly drawn from a distribution with support |$[S,Q]$|⁠, where |$s