AbstractI 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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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10915.
Date of creation: Nov 2004
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Other versions of this item:
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-11-22 (All new papers)
- NEP-DGE-2004-11-22 (Dynamic General Equilibrium)
- NEP-MIC-2004-11-22 (Microeconomics)
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