How did the idea of menu costs develop in your mind?My paper on menu costs, which is one of my three or four most cited papers, was conceived in the spring of 1982, while I was a first-year student at Harvard Law School. I was attending a seminar on antitrust policy, and the speaker (I forget who it was) wrote on the blackboard the standard monopoly diagram. He was discussing damage remedies in antitrust cases and the incentives firms face to monopolize markets. In previous years, I had taken graduate-level macroeconomics from Alan Blinder at Princeton and Stan Fischer at MIT, so macro issues were in the back of my mind. As a result, while I sat in the Law School seminar, I started wondering about why prices are sticky and the incentives monopoly firms face to adjust prices when, for some reason, their prices end up away from profit-maximizing levels.
The lesson: Ideas can pop up in unexpected places.
Update: A commenter asks:
Prof.Mankiw, But you did not tell us how you got the catchy name 'menu costs'.I did not make up the name. The earliest reference I can find to the term in J-stor journals is in "Relative Shocks, Relative Price Variability, and Inflation" by Stanley Fischer, published in 1981, the exact year I was a first-year grad student at MIT. I undoubtedly picked up the name in Stan's course.