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Intertemporal Pricing in Markets with Differential Information

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  • Rustichini, Aldo
  • Villamil, Anne P

Abstract

This paper provides a theory of intertemporal pricing in a small market with differential information about the realizations of a stochastic process which determines demand. We study the sequential equilibria in stationary strategies of the stochastic game between a seller and buyer. The seller has zero cost of producing one unit of a non-durable good in all market periods. The buyer's value for the good is a random variable governed by a simple Markov process. At the beginning of each period the unit's value is determined by nature and is privately revealed to the buyer. The seller posts a single price offer each period, which the buyer either accepts or rejects. Only two types of price paths emerge in equilibrium: either prices are constant, or they have persistent cycles between a low and a high value. In both cases, however, prices are sticky in the sense that changes in price are less frequent than changes in the economy's fundamentals.

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 8 (1996)
Issue (Month): 2 (August)
Pages: 211-27

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Handle: RePEc:spr:joecth:v:8:y:1996:i:2:p:211-27

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Cited by:
  1. Ted Temzelides, 1995. "Evolution, Coordination, and Banking Panics," Finance 9511002, EconWPA.
  2. Lemke, Robert J., 2004. "Dynamic bargaining with action-dependent valuations," Journal of Economic Dynamics and Control, Elsevier, vol. 28(9), pages 1847-1875, July.

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