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Fair Pricing

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Author Info
Julio J. Rotemberg

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Abstract

I suppose that consumers see a firm as fair if they cannot reject the hypothesis that the firm is somewhat benevolent towards them. Consumers that can reject this hypothesis become angry, which is costly to the firm. I show that firms that wish to avoid this anger will keep their prices rigid under some circumstances when prices would vary under more standard assumptions. The desire to appear benevolent can also lead firms to practice both third-degree and intertemporal price discrimination. Thus, the observation of temporary sales is consistent with my model of fair prices. The model can also explain why prices seem to be more responsive to changes in factor costs than to changes in demand that have the same effect on marginal cost, why increases in inflation seem to affect mostly the frequency of price adjustment without having sizeable effects on the size of price increases and why firms often announce their intent to increase prices in advance of actually doing so.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10915.

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Date of creation: Nov 2004
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Handle: RePEc:nbr:nberwo:10915

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Find related papers by JEL classification:
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
D4 - Microeconomics - - Market Structure and Pricing
D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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References listed on IDEAS
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  14. Stiglitz, Joseph E, 1987. "Competition and the Number of Firms in a Market: Are Duopolies More Competitive than Atomistic Markets?," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1041-61, October. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Courty, Pascal & Pagliero, Mario, 2007. "Price Variation Antagonism and Firm Pricing Policies," CEPR Discussion Papers 6663, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Emmanuel Dhyne & Catherine Fuss & Hashem Pesaran & Patrick Sevestre, 2006. "Lumpy price adjustments : a microeconometric analysis," Research series 200610-12, National Bank of Belgium. [Downloadable!]
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  3. Fumiko Hayashi, 2004. "A puzzle of card payment pricing : why are merchants still accepting card payments?," Payments System Research Working Paper PSR WP 04-02, Federal Reserve Bank of Kansas City. [Downloadable!]
  4. Ignazio Angelloni & Luc Aucremanne & Michael Ehrmann & Jordi Galí & Andrew Levin & Frank Smets, 2005. "New Evidence on Inflation Persistence and Price Stickiness in the Euro Area: Implications for Macro Modelling," Economics Working Papers 910, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  5. Courty, Pascal & Pagliero, Mario, 2007. "Do Consumers Care About How Prices Are Set?," CEPR Discussion Papers 6533, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Mackowiak, Bartosz Adam & Smets, Frank, 2008. "On Implications of Micro Price Data for Macro Models," CEPR Discussion Papers 6961, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Robert A. J. Dur & Amihai Glazer, 2004. "Optimal Incentive Contracts For a Worker Who Envies His Boss," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  8. Fumiko Hayashi, 2006. "A Puzzle of Card Payment Pricing: Why Are Merchants Still Accepting Card Payments?," Review of Network Economics, Concept Economics, vol. 5(1), pages 144-174, March. [Downloadable!]
  9. Etienne Gagnon, 2007. "Price setting during low and high inflation: evidence from Mexico," International Finance Discussion Papers 896, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  10. Thomas Giebe & Oliver Gürtler, 2008. "Optimal Contracts for Lenient Supervisors," Discussion Papers 237, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
  11. Young, Andrew & Levy, Daniel, 2006. "Explicit Evidence on an Implicit Contract," MPRA Paper 926, University Library of Munich, Germany. [Downloadable!]
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  12. Jerzy (Jurek) D. Konieczny & Fabio Rumler, 2006. "Regular adjustment - theory and practice," Working Paper Series 669, European Central Bank. [Downloadable!]
  13. Avichai Snir & Daniel Levy, 2005. "Abracadabra! Social Norms and Public Perceptions through Harry Potter’s Looking Glasses," Emory Economics 0528, Department of Economics, Emory University (Atlanta). [Downloadable!]
  14. Robert Dur & Amihai Glazer, 2004. "Optimal Incentive Contracts when Workers envy their Boss," Tinbergen Institute Discussion Papers 04-046/1, Tinbergen Institute, revised 13 Jun 2006. [Downloadable!]
  15. Claudia Kwapil & Johann Scharler & Josef Baumgartner, 2007. "Price-setting behavior of Austrian firms," Empirica, Springer, vol. 34(5), pages 491-505, December. [Downloadable!] (restricted)
  16. Lorenz Goette & Rudolf Minsch & Jean-Robert Tyran, 2005. "Micro Evidence on the Adjustment of Sticky-Price Goods: It's How Often, not How Much," Discussion Papers 05-20, University of Copenhagen. Department of Economics. [Downloadable!]
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