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Search with Learning and Price Adjustment Dynamics

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  • Fishman, Arthur

Abstract

This paper presents a theory of limited price responsiveness to cost shocks in a context of search with learning. Consumers confuse general cost shocks, common to all firms in the industry, with firm specific shocks. In the case of a general cost increase, this confusion leads to an excessive propensity to search, temporarily inhibiting price increases, lest they encourage search. In the case of an idiosyncratic shock, consumers initially search too little, allowing the prices of high cost firms to temporarily overshoot.

Suggested Citation

  • Fishman, Arthur, 1995. "Search with Learning and Price Adjustment Dynamics," Foerder Institute for Economic Research Working Papers 275604, Tel-Aviv University > Foerder Institute for Economic Research.
    • Handle: RePEc:ags:isfiwp:275604
    DOI: 10.22004/ag.econ.275604
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    File URL: https://ageconsearch.umn.edu/record/275604/files/TEL-AVIV-FSWP-241.pdf
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    References listed on IDEAS

    as
    1. Stanley Fischer, 1981. "Relative Shocks, Relative Price Variability, and Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 381-442.
    2. George A. Akerlof & Janet L. Yellen, 1985. "A Near-Rational Model of the Business Cycle, with Wage and Price Inertia," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(Supplemen), pages 823-838.
    3. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    4. Roland Bénabou & Robert Gertner, 1993. "Search with Learning from Prices: Does Increased Inflationary Uncertainty Lead to Higher Markups?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(1), pages 69-93.
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    Cited by:

    1. Fishman, Arthur, 1995. "A Theory of Price Inertia," Foerder Institute for Economic Research Working Papers 275605, Tel-Aviv University > Foerder Institute for Economic Research.

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