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Optimal Price Setting During a Currency Changeover: Theory and Evidence from French Restaurants

  • Berardi, N.
  • Eife, T. A.
  • Gautier, E.

This paper studies firms' price-setting decision during a currency changeover. Buyers' difficulties with the new nominal price level create incentives to raise prices temporarily but doing so comes at the risk of damaging a seller's reputation in the long run. We model firms' trade-off and study under which conditions increasing or decreasing prices is optimal. A key variable in the decision is buyers' information about a firm's conversion, which in turn is affected by (i) a firm's size, (ii) the proportion of regular buyers, and (iii) the visibility of a good's price. Difference-in-differences analyses based on micro-data of French restaurants strongly support the model's predictions empirically. Indeed, prices around the 2002 changeover in the European Monetary Union are less likely to rise in larger and non-tourist restaurants, especially when prices are advertised.

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Paper provided by Banque de France in its series Working papers with number 371.

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Length: 33 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:bfr:banfra:371
Contact details of provider: Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
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  1. Fougère, Denis & Le Bihan, Hervé & Sevestre, Patrick, 2005. "Heterogeneity in consumer price stickiness: a microeconometric investigation," Working Paper Series 0536, European Central Bank.
  2. McDonald, John F & Moffitt, Robert A, 1980. "The Uses of Tobit Analysis," The Review of Economics and Statistics, MIT Press, vol. 62(2), pages 318-21, May.
  3. Fougere, Denis & Gautier, Erwan & Le Bihan, Herve, 2008. "Restaurant Prices And The Minimum Wage," Working Papers 44084, American Association of Wine Economists.
  4. Hoffmann, Johannes & Kurz-Kim, Jeong-Ryeol, 2006. "Consumer price adjustment under the microscope: Germany in a period of low inflation," Discussion Paper Series 1: Economic Studies 2006,16, Deutsche Bundesbank, Research Centre.
  5. Denis Fougère & Hervé Le Bihan & Patrick Sevestre, 2007. "Heterogeneity in consumer price stickiness. A microeconometric investigation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00278922, HAL.
  6. Eugenio Gaiotti & Francesco Lippi, 2004. "Pricing Behavior and the Introduction of the Euro: Evidence from a Panel of Restaurants in Italy," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 63(3-4), pages 491-526, December.
  7. Laurent Baudry & Hervé Le Bihan & Patrick Sevestre & Sylvie Tarrieu, 2007. "What do Thirteen Million Price Records have to Say about Consumer Price Rigidity?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(2), pages 139-183, 04.
  8. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
  9. Bart Hobijn & Federico Ravenna & Andrea Tambalotti, 2004. "Menu costs at work: restaurant prices and the introduction of the euro," Staff Reports 195, Federal Reserve Bank of New York.
  10. Bagwell, Kyle, 2007. "The Economic Analysis of Advertising," Handbook of Industrial Organization, Elsevier.
  11. Wioletta Dziuda & Giovanni Mastrobuoni, 2009. "The Euro Changeover and Its Effects on Price Transparency and Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 101-129, 02.
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