The purpose of the thesis is to introduce novel measure of real marginal cost in the New Keynesian Phillips Curve (NKPC) and compares its performance with conventional mea- sures such as output gap and labour share of income. Real marginal cost is derived from a flexible function whereas labour share is based on restrictive assumption of Cobb-Douglas technology. Dynamic correlations and results of NKPC indicate that real marginal cost is better than ad hoc measure of output gap and labour share. Given the heterogeneity in price setting behaviour across sectors, cost functions and NKPC are estimated for the agriculture, manufacturing and other sectors of Pakistan's economy. Real marginal cost is derived from static and dynamic cost functions. In the presence of adjustment costs, dynamic cost functions that are consistent and integrated with their static systems are required. Such dynamic translog cost functions are estimated after testing the theoretical properties and existence of long term relationships in the static functions. Cost attributes, marginal cost, total factor productivity, technological progress, demand and substitution elasticities are derived from static and dynamic functions. Three specifications of forward looking and hybrid form of the Phillips curves are estimated with real marginal cost, output gap and labour share. Results indicate that hybrid specifications perform better than the forward looking models in terms of goodness of fit and statistical significance. Further, comparison of Phillips curves estimated with real marginal cost, output gap and labour share indicate that real marginal cost performs better in explaining inflation dynamics in Pakistan. The results indicate that forward looking behaviour dominates and high level of nominal rigidities persists in Pakistan. Finally, hybrid form of the NKPC is estimated for a panel of sixteen Asian economies. With the consideration of heterogeneity and aggregation bias, the mean group, random coefficient and weighted average coefficients are derived from individual estimates. The unobserved time variant common factors cause cross correlation in the errors that may lead towards inconsistent estimates. Therefore, cross section averages of the explanatory and the dependent variables are augmented in hybrid specification to capture the effect of latent variables. Findings suggest that the discount factor is almost 0.94, the nominal rigidities are 33% and the weights of expected and past inflation are 66% and 33% respectively. Nominal rigidities of the Asian economies are lower than the estimates for US and Euro areas. The weights of expected and past inflation of the Asian economies are consistent with the US but lower than the estimates from the Euro areas.

Esta tesis consta de tres capítulos en donde analizo mercados con fricciones. En los dos primeros capítulos, estas fricciones surgen debido a la carencia información completa acerca de los precios por parte de los consumidores. Puntualmente, en el primer capítulo, se estudia como se desarrolla la competición de precio multiproducto en este tipo de ambiente. Se encuentra que la búsqueda por precios bajos por parte de los consumidores conlleva a que las firmas fijen los precios de los productos complementarios de manera correlativamente inversa. De esta manera, las firmas buscan incrementar sus ganancias valiéndose de aquellos consumidores que no investigan lo suficiente. En el siguiente capítulo se analiza cuales son los efectos que genera la búsqueda de mejores precios en la determinación de los mismos cuando las firmas tienen diferentes costos marginales. Se demuestra que firmas con diferentes estructuras de costos no pueden fijar los mismos precios en equilibrio. Debido a esto, mayores costos conllevan a mayores precios promedios. Finalmente, en el tercer capítulo, las fricciones emergen debido a que las firmas no tienen acceso a todos los mercados. Se analiza la competición en cantidades que se desarrolla luego de la etapa de inversión en capacidad productiva. Se demuestra que la capacidad productiva es mayor que la generada en un modelo Cournot estándar debido los incentivos pro-competitivos presentes en los mercados fragmentados. / This thesis consists of three chapters analyzing markets with frictions. In the first two chapters frictions result from consumers not knowing all the prices and searching for them. The first chapter studies multiproduct price competition in this environment. It finds that consumer search induces firms to negatively correlate prices of complements in order to rip-off consumers who do not search enough. The second chapter studies the effects of consumer search on price competition when firms have different marginal costs. It demonstrates that firms with different costs cannot charge common prices in equilibrium. Due to this, the higher are the costs the higher are the average prices charged by firms. In the third chapter frictions emerge because firms do not have access to all the markets. It analyzes quantity competition following a capacity investment stage to show that equilibrium capacity is larger than in a standard Cournot model because of pro-competitive incentives in fragmented markets.