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

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Author Info

  • 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.

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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 371.

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Length: 33 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:bfr:banfra:371

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Keywords: Price setting; changeover; euro; inflation.;

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