A striking fact about prices is the prevalence of ``sales': large temporary price cuts followedby a return exactly to the former price. This paper builds a macroeconomic model with arationale for sales based on firms facing consumers with different price sensitivities. Even iffirms can vary sales without cost, monetary policy has large real effects owing to sales beingstrategic substitutes: a firm's incentive to have a sale is decreasing in the number of otherfirms having sales. Thus the flexibility of prices at the micro level due to sales does nottranslate into flexibility at the macro level.
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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number
dp0887.
Find related papers by JEL classification: E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
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