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Search, Price Setting and Inflation

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  • Roland Benabou

Abstract

A model of monopolistic competition in an inflationary environment is developed which embodies optimal sequential search, price dynamics and entry on the part of consumers and firms respectively. Equilibrium price strategies are (S, s); these bounds increase continuously with consumer search costs, and so does price dispersion. Indeed, the whole equilibrium varies smoothly from the competitive (Bertrand) to the monopolistic (Diamond (1971)) end of the spectrum. The latter's paradoxical result is explained as a limiting case where frictions on firms' side of the market (price adjustment costs) but not on buyers' (search costs) tend to zero. A positive relationship between (smooth and perfectly anticipated) inflation and price dispersion or uncertainty is established.

Suggested Citation

  • Roland Benabou, 1988. "Search, Price Setting and Inflation," Review of Economic Studies, Oxford University Press, vol. 55(3), pages 353-376.
  • Handle: RePEc:oup:restud:v:55:y:1988:i:3:p:353-376.
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    File URL: http://hdl.handle.net/10.2307/2297389
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    1. Hugo Sonnenschein, 1968. "The Dual of Duopoly Is Complementary Monopoly: or, Two of Cournot's Theories Are One," Journal of Political Economy, University of Chicago Press, vol. 76, pages 316-316.
    2. Jeremy I. Bulow & John Geanakoplos & Paul D. Klemperer, 1983. "Multimarket Oligopoly," Cowles Foundation Discussion Papers 674, Cowles Foundation for Research in Economics, Yale University.
    3. Sanyal, Kalyan K & Jones, Ronald W, 1982. "The Theory of Trade in Middle Products," American Economic Review, American Economic Association, vol. 72(1), pages 16-31, March.
    4. McCulloch, Rachel & Johnson, Harry G, 1973. "A Note on Proportionally Distributed Quotas," American Economic Review, American Economic Association, vol. 63(4), pages 726-732, September.
    5. Gene M. Grossman, 1981. "The Theory of Domestic Content Protection and Content Preference," The Quarterly Journal of Economics, Oxford University Press, vol. 96(4), pages 583-603.
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