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Rationally Inattentive Seller: Sales and Discrete Pricing

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  • Filip Matejka

Abstract

This paper presents a model of a rationally inattentive seller responding to shocks to unit input cost. The model generates price series imultaneously exhibiting all three of the following features that can be found in the data. 1) Prices change frequently. 2) Responses of prices to aggregate variables are delayed. 3) Prices move back and forth between a few rigid values. Discrete pricing arises even if the unit input cost varies in a continuous range. Results of the model also agree with the evidence that reductions in price, e.g. sales, are usually short-lasting and that the highest price in a sample tends to be the most quoted price. Discrete and asymmetric pricing is a seller's optimal response to his limited information capacity. Moreover, the model provides rationale for faster responses to aggregate shocks in industries with more volatile idiosyncratic shocks as well as for a steeper Philip's curve in less stable aggregate conditions.

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Bibliographic Info

Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp408.

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Date of creation: Mar 2010
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Handle: RePEc:cer:papers:wp408

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Keywords: Rational inattention; nominal rigidity; sales;

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References

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  1. Ricardo Reis, 2005. "Inattentive Producers," 2005 Meeting Papers 290, Society for Economic Dynamics.
  2. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  3. Mackowiak, Bartosz Adam & Wiederholt, Mirko, 2007. "Optimal Sticky Prices under Rational Inattention," CEPR Discussion Papers 6243, C.E.P.R. Discussion Papers.
  4. Patrick J. Kehoe & Virgiliu Midrigan, 2007. "Sales and the real effects of monetary policy," Working Papers 652, Federal Reserve Bank of Minneapolis.
  5. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," NBER Working Papers 8290, National Bureau of Economic Research, Inc.
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Cited by:
  1. Bartosz Mackowiak & Mirko Wiederholt, 2008. "Business Cycle Dynamics under Rational Inattention," 2008 Meeting Papers 1059, Society for Economic Dynamics.
  2. James Costain & Anton Nakov, 2013. "Logit price dynamics," Banco de Espa�a Working Papers 1301, Banco de Espa�a.
  3. Fernando Alvarez & Francesco Lippi & Luigi Paciello, 2010. "Optimal Price Setting with Observation and Menu Costs," EIEF Working Papers Series 1010, Einaudi Institute for Economics and Finance (EIEF), revised May 2010.
  4. Luigi Paciello & Mirko Wiederholt, 2014. "Exogenous Information, Endogenous Information, and Optimal Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 81(1), pages 356-388.
  5. Anton Nakov & James Costain, 2010. "Precautionary price stickiness," 2010 Meeting Papers 774, Society for Economic Dynamics.
  6. Filip Matejka & Alisdair McKay, 2011. "Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model," CERGE-EI Working Papers wp442, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  7. Mackowiak, Bartosz Adam & Wiederholt, Mirko, 2011. "Inattention to Rare Events," CEPR Discussion Papers 8626, C.E.P.R. Discussion Papers.
  8. Tim Willems, 2013. "Actively Learning by Pricing: A Model of an Experimenting Seller," Economics Series Working Papers 687, University of Oxford, Department of Economics.
  9. Ernesto Pasten, 2012. "Rational Inattention, Multi-Product Firms and the Neutrality of Money," 2012 Meeting Papers 346, Society for Economic Dynamics.
  10. Luminita Stevens, 2011. "Pricing Regimes in Disaggregated Data," 2011 Meeting Papers 1389, Society for Economic Dynamics.
  11. Michael Woodford, 2008. "Information-Constrained State-Dependent Pricing," Discussion Papers 0809-12, Columbia University, Department of Economics.

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