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Search, Costly Price Adjustment and the Frequency of Price Changes - Theory and Evidence

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Abstract

We establish a new empirical finding that the intensity of search for the best price affects the frequency of nominal price changes. This relationship holds in very different economies and for various proxies for search intensity. We derive this relationship from a model of monopolistically competitive firms that face menu costs of changing nominal prices and heterogeneous consumers who search for the best price. We discuss alternative explanations and argue that they do not explain the observed correlations. Our results establish that pricing policies differ endogenously in the cross-section. This may be an important feature missing in many macroeconomic models based on nominal rigidities with exogenous frequency of price changes.

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File URL: http://www.wlu.ca/documents/20944/New_test.pdf
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Bibliographic Info

Paper provided by Wilfrid Laurier University, Department of Economics in its series Working Papers with number eg0054.

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Length: 48
Date of creation: 2006
Date of revision: 2006
Handle: RePEc:wlu:wpaper:eg0054

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Keywords: Nominal rigidity; search; price adjustment;

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References

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Cited by:
  1. Daniel Levy & Dongwon Lee & Haipeng (Allan) Chen & Robert J. Kauffman & Mark Bergen, 2010. "Price Points and Price Rigidity," Working Papers 2010-21, Department of Economics, Bar-Ilan University.
  2. Tack Yun & Andrew Levin, 2009. "Reconsidering the Microeconomic Foundations of Price-Setting Behavior," 2009 Meeting Papers 798, Society for Economic Dynamics.

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