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Aggregation and Optimization with State-Dependent Pricing


  • Andrew Caplin
  • John Leahy


The literature on the aggregation of (S,s) policies has generally ignored the impact of aggregates on individual decisions. In the case of pricing, the feedback effects are clear. Not only do pricing strategies determine the evolution of the price level, the evolution of the price level influences pricing strategies. The authors provide a consistent treatment of aggregation and optimization and study three issues in the pricing literature: the relationship between strategic complementarity and the real effects of money; the relationship between the variance of money and the correlation between money and output; and the relationship between the cost and size of price adjustment.

Suggested Citation

  • Andrew Caplin & John Leahy, 1997. "Aggregation and Optimization with State-Dependent Pricing," Econometrica, Econometric Society, vol. 65(3), pages 601-626, May.
  • Handle: RePEc:ecm:emetrp:v:65:y:1997:i:3:p:601-626

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    References listed on IDEAS

    1. Boylan Richard T. & El-Gamal Mahmoud A., 1993. "Fictitious Play: A Statistical Study of Multiple Economic Experiments," Games and Economic Behavior, Elsevier, vol. 5(2), pages 205-222, April.
    2. Van Huyck, John B & Battalio, Raymond C & Beil, Richard O, 1990. "Tacit Coordination Games, Strategic Uncertainty, and Coordination Failure," American Economic Review, American Economic Association, vol. 80(1), pages 234-248, March.
    3. Robles, Jack, 1997. "Evolution and Long Run Equilibria in Coordination Games with Summary Statistic Payoff Technologies," Journal of Economic Theory, Elsevier, vol. 75(1), pages 180-193, July.
    4. Kandori, Michihiro & Mailath, George J & Rob, Rafael, 1993. "Learning, Mutation, and Long Run Equilibria in Games," Econometrica, Econometric Society, vol. 61(1), pages 29-56, January.
    5. Jeffrey S. Banks & Charles R. Plott & David P. Porter, 1988. "An Experimental Analysis of Unanimity in Public Goods Provision Mechanisms," Review of Economic Studies, Oxford University Press, vol. 55(2), pages 301-322.
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