A Search Theory of Rigid Prices
AbstractIn this paper, I build a model marketplace populated by a finite number of sellers – each producing its own variety of the good – and a continuum of buyers–each searching for a variety he likes. Using the model, I study the response of a seller’s price to privately observed fluctuations in its idiosyncratic production cost. I find that the qualitative properties of this response critically depend on the persistence of the production cost. In particular, if the cost is i.i.d., the seller’s price does not respond at all. If the cost is somewhat persistent, the seller’s price responds slowly and incompletely. If the cost is very persistent, the seller’s price adjusts instantaneously and efficiently to all fluctuations in productivity. I argue that these findings can explain why the monthly frequency of a price change is so much lower for processed than for raw goods.
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Bibliographic InfoPaper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 07-031.
Length: 31 pages
Date of creation: 01 Mar 2007
Date of revision:
Search Frictions; Asymmetric Information; Rigid Prices; Sticky Prices;
Find related papers by JEL classification:
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-10-13 (All new papers)
- NEP-COM-2007-10-13 (Industrial Competition)
- NEP-DGE-2007-10-13 (Dynamic General Equilibrium)
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