Optimal Price Setting During a Currency Changeover: Theory and Evidence from French Restaurants
AbstractThis 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 InfoPaper provided by Banque de France in its series Working papers with number 371.
Length: 33 pages
Date of creation: 2012
Date of revision:
Price setting; changeover; euro; inflation.;
Find related papers by 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 - - Marketing and Advertising - - - Other
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-21 (All new papers)
- NEP-EEC-2012-03-21 (European Economics)
- NEP-MAC-2012-03-21 (Macroeconomics)
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