Despite the expectations of economists that the euro changeover would have no effect on prices, we show that European consumers perceive the contrary. The data indicate that consumers based their perceptions about inflation on goods that are cheaper and more frequently purchased. We use this insight to develop and estimate a model of imperfect information that explains why these goods were subject to higher price growth after the changeover. The data indicate that some retailers, aware of the consumers' difficulties in adopting the new currency, used the changeover to increase profits by increasing prices. We also propose an explanation on why, contrary to common belief, this effect was smaller in more concentrated retail markets.
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Find related papers by JEL classification: D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
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