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Optimal Price Setting During a Currency Changeover: Theory and Evidence from French Restaurants

Author

Listed:
  • Berardi, N.
  • Eife, T. A.
  • Gautier, E.

Abstract

This paper studies firms' price-setting decision during a currency changeover. Buyers' difficulties with the new nominal price level create incentives to raise prices temporarily but doing so comes at the risk of damaging a seller's reputation in the long run. We model firms' trade-off and study under which conditions increasing or decreasing prices is optimal. A key variable in the decision is buyers' information about a firm's conversion, which in turn is affected by (i) a firm's size, (ii) the proportion of regular buyers, and (iii) the visibility of a good's price. Difference-in-differences analyses based on micro-data of French restaurants strongly support the model's predictions empirically. Indeed, prices around the 2002 changeover in the European Monetary Union are less likely to rise in larger and non-tourist restaurants, especially when prices are advertised.

Suggested Citation

  • Berardi, N. & Eife, T. A. & Gautier, E., 2012. "Optimal Price Setting During a Currency Changeover: Theory and Evidence from French Restaurants," Working papers 371, Banque de France.
    • Handle: RePEc:bfr:banfra:371
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    References listed on IDEAS

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    Cited by:

    1. Mustafa Utku Özmen, 2020. "In Pursuit Of Understanding Markups In Restaurant Services Prices," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 65(06), pages 1423-1437, December.

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    More about this item

    Keywords

    Price setting; changeover; euro; inflation.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • M39 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Other

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