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Rigid Pricing and Rationally Inattentive Consumer

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  • Filip Matejka

Abstract

This paper proposes a mechanism leading to rigid pricing as an optimal strategy. It applies a framework of rational inattention to study the pricing strategies of a monopolistic seller facing a consumer with limited information capacity. The consumer needs to process information about prices, while the seller is perfectly attentive. It turns out that the seller chooses to price discretely even for a continuous range of unit input costs, i.e. charges a finite set of different prices only. The price usually stays constant when unit input cost changes only a little. The seller does so to provide the consumer with easily observable prices and thus stimulate her to consume more. In the model's dynamic version, this mechanism implies that prices respond to cost shocks with a delay.

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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 wp409.

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Date of creation: Apr 2010
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Handle: RePEc:cer:papers:wp409

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Keywords: Rational inattention; nominal rigidity;

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References

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  1. Eichenbaum, Martin & Jaimovich, Nir & Rebelo, Sérgio, 2008. "Reference Prices and Nominal Rigidities," CEPR Discussion Papers 6709, C.E.P.R. Discussion Papers.
  2. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  3. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Harvard Institute of Economic Research Working Papers 1922, Harvard - Institute of Economic Research.
  4. Mackowiak, Bartosz Adam & Wiederholt, Mirko, 2007. "Optimal Sticky Prices under Rational Inattention," CEPR Discussion Papers 6243, C.E.P.R. Discussion Papers.
  5. Ricardo Reis, 2005. "Inattentive Producers," 2005 Meeting Papers 290, Society for Economic Dynamics.
  6. Alan S. Blinder, 1991. "Why are Prices Sticky? Preliminary Results from an Interview Study," NBER Working Papers 3646, National Bureau of Economic Research, Inc.
  7. Sims, Christopher A., 2005. "Rational inattention: a research agenda," Discussion Paper Series 1: Economic Studies 2005,34, Deutsche Bundesbank, Research Centre.
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Citations

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Cited by:
  1. Tim Willems, 2013. "Actively Learning by Pricing: A Model of an Experimenting Seller," Economics Series Working Papers 687, University of Oxford, Department of Economics.
  2. Saint-Paul, Gilles, 2010. "A "quantum" approach to rational inattention," CEPR Discussion Papers 7739, C.E.P.R. Discussion Papers.
  3. Kristoffer Nimark, 2011. "Man-bites-dog business cycles," Economics Working Papers 1341, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2013.
  4. Ryan A Chahrour, 2011. "Transparency and Costly Information Acquisition," 2011 Meeting Papers 1221, Society for Economic Dynamics.
  5. Antonella Tutino, 2013. "Rationally inattentive consumption choices," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(3), pages 421-439, July.
  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. Xavier Gabaix, 2011. "A Sparsity-Based Model of Bounded Rationality," NBER Working Papers 16911, National Bureau of Economic Research, Inc.
  8. Jean-Paul L'Huillier, 2012. "Consumers' Imperfect Information and Price Rigidities," EIEF Working Papers Series 1209, Einaudi Institute for Economics and Finance (EIEF), revised Aug 2012.
  9. Mackowiak, Bartosz Adam & Wiederholt, Mirko, 2011. "Inattention to Rare Events," CEPR Discussion Papers 8626, C.E.P.R. Discussion Papers.

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