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Intertemporal Pricing in Markets with Differential Information

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  • Rustichini, Aldo
  • Villamil, Anne P

Abstract

This paper provides a theory of intertemporal pricing in a small market with differential information about the realizations of a stochastic process which determines demand. We study the sequential equilibria in stationary strategies of the stochastic game between a seller and buyer. The seller has zero cost of producing one unit of a non-durable good in all market periods. The buyer's value for the good is a random variable governed by a simple Markov process. At the beginning of each period the unit's value is determined by nature and is privately revealed to the buyer. The seller posts a single price offer each period, which the buyer either accepts or rejects. Only two types of price paths emerge in equilibrium: either prices are constant, or they have persistent cycles between a low and a high value. In both cases, however, prices are sticky in the sense that changes in price are less frequent than changes in the economy's fundamentals.

Suggested Citation

  • Rustichini, Aldo & Villamil, Anne P, 1996. "Intertemporal Pricing in Markets with Differential Information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(2), pages 211-227, August.
  • Handle: RePEc:spr:joecth:v:8:y:1996:i:2:p:211-27
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    Cited by:

    1. Temzelides, Theodosios, 1997. "Evolution, coordination, and banking panics," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 163-183, September.
    2. Runco Mariano G, 2010. "A Note on the Multidimensional Monopolist Problem and Intertemporal Price Discrimination," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-8, August.
    3. Lemke, Robert J., 2004. "Dynamic bargaining with action-dependent valuations," Journal of Economic Dynamics and Control, Elsevier, vol. 28(9), pages 1847-1875, July.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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