Information and Barometric Prices: An Explanation for Price Stickiness
AbstractPrice stickiness plays a decisive role in many macroeconomic models, yet why prices are sticky remains a puzzle. We develop a microeconomic model in which two competing firms are free to set prices, but face uncertainty about the state of demand. With some probability, there is a positive demand shock, which is observed but by one firm. In equilibrium, only the informed firm adjusts its price after the shock, while the uninformed firm raises its price only with a delay, after observing the price of its competitor. Hence, prices are sticky in the sense that one firm's price does not adjust immediately. Further, if getting information is costly, the model implies that the larger firm tends to be better informed and to adjust its price first.
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Date of creation: Jun 2002
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More information through EDIRC
Price Setting; Sticky Prices; Asymmetric Information; Barometic Price Leadership;
Find related papers by JEL classification:
- L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-09-11 (All new papers)
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American Economic Association, vol. 81(3), pages 539-52, June.
- Cooper, David J., 1997. "Barometric price leadership," International Journal of Industrial Organization, Elsevier, vol. 15(3), pages 301-325, May.
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