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Rationally Inattentive Seller: Sales and Discrete Pricing

Listed author(s):
  • Filip Matějka

Prices tend to remain constant for a period of time and then jump. In the literature, this "rigidity" is usually interpreted to reflect a cost of adjusting prices. This article shows that price rigidity can alternatively reflect optimal price setting when there are no adjustment costs, namely, if the seller is rationally inattentive. The model generates non-trivial pricing patterns that are consistent with the data and that are hard to explain with the traditional adjustment-cost model. In particular, prices are adjusted frequently but move back and forth between a few given values, hazard functions are downward sloping, and responses to persistent shocks are sluggish. These results are obtained in a model that implements rational inattention without simplifying assumptions on the functional forms of the processed signals.

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File URL: http://hdl.handle.net/10.1093/restud/rdv049
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Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 83 (2016)
Issue (Month): 3 ()
Pages: 1125-1155

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Handle: RePEc:oup:restud:v:83:y:2016:i:3:p:1125-1155.
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  1. Patrick J. Kehoe & Virgiliu Midrigan, 2007. "Sales and the real effects of monetary policy," Working Papers 652, Federal Reserve Bank of Minneapolis.
  2. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1295-1328.
  3. Bartosz Mackowiak & Mirko Wiederholt, 2009. "Optimal Sticky Prices under Rational Inattention," American Economic Review, American Economic Association, vol. 99(3), pages 769-803, June.
  4. Woodford, Michael, 2009. "Information-constrained state-dependent pricing," Journal of Monetary Economics, Elsevier, vol. 56(S), pages 100-124.
  5. Ricardo Reis, 2006. "Inattentive Producers," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 793-821.
  6. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  7. Emi Nakamura & Jon Steinsson, 2005. "Price Setting in a Forward-Looking Customer Market," Macroeconomics 0509010, EconWPA.
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