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Price setting, price dispersion, and the value of money: or, the law of two prices

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  • Curtis, Elisabeth
  • Wright, Randall

Abstract

We study models that combine search, monetary exchange, price posting by sellers, and buyers with preferences that differ across random meetings - say, because sellers in different meetings produce different varieties of the same good. We show how these features interact to influence the price level (i.e., the value of money) and price dispersion. First, price-posting equilibria exist with valued fiat currency, which is not true in the standard model. Second, although both are possible, price dispersion is more common than a single price. Third, perhaps surprisingly, we prove generically there cannot be more than two prices in equilibrium.
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  • Curtis, Elisabeth & Wright, Randall, 2004. "Price setting, price dispersion, and the value of money: or, the law of two prices," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1599-1621, November.
  • Handle: RePEc:eee:moneco:v:51:y:2004:i:8:p:1599-1621
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    1. Edward J. Green & Ruilin Zhou, "undated". ""A Rudimentary Model of Search with Divisible Money and Prices''," CARESS Working Papres 95-17, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
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    9. Zhou, Ruilin, 1999. "Individual and Aggregate Real Balances in a Random-Matching Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 1009-1038, November.
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    Cited by:

    1. Guido Menzio & Nicholas Trachter, 2014. "Large and Small Sellers: A Theory of Equilibrium Price Dispersion with Sequential Search," Working Paper 14-8, Federal Reserve Bank of Richmond.
    2. repec:ebl:ecbull:v:5:y:2008:i:7:p:1-7 is not listed on IDEAS
    3. International Monetary Fund, 2006. "Equilibrium Wage Dispersion: An Example," IMF Working Papers 2006/019, International Monetary Fund.
    4. Young Sik Kim & Manjong Lee, 2013. "Separation of Unit of Account from Medium of Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(8), pages 1685-1703, December.
    5. Benoit Julien & Richard Dutu, 2008. "Ex-ante production, directed search and indivisible money," Economics Bulletin, AccessEcon, vol. 5(7), pages 1-7.
    6. Gaumont, Damien & Schindler, Martin & Wright, Randall, 2006. "Alternative theories of wage dispersion," European Economic Review, Elsevier, vol. 50(4), pages 831-848, May.
    7. Stephen D. Williamson & Randall Wright, 2010. "New monetarist economics: methods," Review, Federal Reserve Bank of St. Louis, vol. 92(May), pages 265-302.
    8. Ennis, Huberto M., 2008. "Search, money, and inflation under private information," Journal of Economic Theory, Elsevier, vol. 138(1), pages 101-131, January.
    9. Gaumont Damien & Schindler Martin & Wright Randall, 2006. "Equilibrium Wage Dispersion: An Example," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(2), pages 1-18, October.
    10. Williamson, Stephen & Wright, Randall, 2010. "New Monetarist Economics: Models," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 2, pages 25-96, Elsevier.
    11. Alberto Trejos & Randall Wright, 2014. "Search-Based Models of Money and Finance: An Integrated Approach," Working Papers 709, Federal Reserve Bank of Minneapolis.
    12. Lucy Qian Liu & Liang Wang & Randall Wright, 2015. "Costly Credit and Sticky Prices," Working Papers 201505, University of Hawaii at Manoa, Department of Economics.
    13. Menzio, Guido & Trachter, Nicholas, 2015. "Equilibrium price dispersion with sequential search," Journal of Economic Theory, Elsevier, vol. 160(C), pages 188-215.
    14. Jean, Kasie & Rabinovich, Stanislav & Wright, Randall, 2010. "On the multiplicity of monetary equilibria: Green-Zhou meets Lagos-Wright," Journal of Economic Theory, Elsevier, vol. 145(1), pages 392-401, January.
    15. Gallin, Joshua & Verbrugge, Randal J., 2019. "A theory of sticky rents: Search and bargaining with incomplete information," Journal of Economic Theory, Elsevier, vol. 183(C), pages 478-519.
    16. Randall Wright & Philipp Kircher & Benoit Julîen & Veronica Guerrieri, 2017. "Directed Search: A Guided Tour," NBER Working Papers 23884, National Bureau of Economic Research, Inc.
    17. Song, Jae Eun, 2014. "Competitive Search Equilibrium in the Credit Market under Asymmetric Information and Limited Commitment," MPRA Paper 57515, University Library of Munich, Germany.
    18. Boragan Aruoba, S. & Rocheteau, Guillaume & Waller, Christopher, 2007. "Bargaining and the value of money," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2636-2655, November.
    19. Han Han & Benoit Julien & Asgerdur Petursdottir & Liang Wang, 2016. "Credit, Money and Asset Equilibria with Indivisible Goods," Working Papers 201601, University of Hawaii at Manoa, Department of Economics.
    20. Burdett, Kenneth & Trejos, Alberto & Wright, Randall, 2017. "A new suggestion for simplifying the theory of money," Journal of Economic Theory, Elsevier, vol. 172(C), pages 423-450.
    21. Benoît Julien & John Kennes & Ian King, 2005. "Monetary Exchange with Multilateral Matching," Discussion Papers 05-18, University of Copenhagen. Department of Economics, revised Oct 2005.
    22. Benoit Julien & Asgerdur Petursdottir & Liang Wang, 2014. "Monetary Equilibria with Indivisible Goods," Working Papers 201428, University of Hawaii at Manoa, Department of Economics.
    23. Dong, Mei & Jiang, Janet Hua, 2014. "Money and price posting under private information," Journal of Economic Theory, Elsevier, vol. 150(C), pages 740-777.
    24. Julien, BenoI^t & Kennes, John & King, Ian, 2008. "Bidding for money," Journal of Economic Theory, Elsevier, vol. 142(1), pages 196-217, September.
    25. International Monetary Fund, 2005. "Alternative Models of Wage Dispersion," IMF Working Papers 2005/064, International Monetary Fund.

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