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Business as Usual: A Consumer Search Theory of Sticky Prices and Asymmetric Price Adjustment

Author

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  • Luís Cabral

    (IESE Business School and NYU)

  • Arthur Fishman

    () (Bar-Ilan University)

Abstract

Empirical evidence suggests that prices are sticky with respect to cost changes. Moreover, prices respond more rapidly to cost increases than to cost decreases. We develop a search theoretic model which is consistent with this evidence and allows for additional testable predictions. Our results are based on the assumption that buyers do not observe the sellers׳ costs, but know that cost changes are positively correlated across sellers. In equilibrium, a change in price is likely to induce consumer search, which explains sticky prices. Moreover, the signal conveyed by a price decrease is different from the signal conveyed by a price increase, which explains asymmetry in price adjustment.

Suggested Citation

  • Luís Cabral & Arthur Fishman, 2011. "Business as Usual: A Consumer Search Theory of Sticky Prices and Asymmetric Price Adjustment," Working Papers 2011-01, Bar-Ilan University, Department of Economics.
  • Handle: RePEc:biu:wpaper:2011-01
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    References listed on IDEAS

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    Cited by:

    1. Mulder, M. & Willems, Bert, 2016. "Competition in Retail Electricity Markets : An Assessment of Ten Years Dutch Experience," Discussion Paper 2016-011, Tilburg University, Tilburg Law and Economic Center.
    2. repec:bla:randje:v:48:y:2017:i:4:p:877-905 is not listed on IDEAS
    3. Osborne, Matthew & Shapiro, Adam Hale, 2014. "A Dynamic Model of Price Signaling, Consumer Learning, and Price Adjustment," Working Paper Series 2014-27, Federal Reserve Bank of San Francisco.
    4. Michael Fung, 2014. "Ocean Carriers’ Collusion Under Antitrust Immunity: Evidence of Asymmetric Pass-Through," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 45(1), pages 59-77, August.
    5. David P. Byrne, Gordon W. Leslie, and Roger Ware, 2015. "How do Consumers Respond to Gasoline Price Cycles?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    6. Kate Ho & Joseph Hogan & Fiona Scott Morton, 2017. "The impact of consumer inattention on insurer pricing in the Medicare Part D program," RAND Journal of Economics, RAND Corporation, vol. 48(4), pages 877-905, December.
    7. Adam Reiff & Peter Karadi, 2011. "Large Shocks in Menu Cost Models," 2011 Meeting Papers 884, Society for Economic Dynamics.
    8. Adam Reiff & Peter Karadi, 2014. "Menu Costs, Aggregate Fluctuations and Large Shocks," 2014 Meeting Papers 914, Society for Economic Dynamics.
    9. Gupta, Rangan & Kotzé, Kevin, 2017. "The role of oil prices in the forecasts of South African interest rates: A Bayesian approach," Energy Economics, Elsevier, vol. 61(C), pages 270-278.
    10. Antoniou, Fabio & Fiocco, Raffaele & Guo, Dongyu, 2017. "Asymmetric price adjustments: A supply side approach," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 335-360.
    11. William (Bill) Zame & Jean-Paul L'Huillier, 2015. "Optimally Sticky Prices," 2015 Meeting Papers 621, Society for Economic Dynamics.
    12. repec:bla:reviec:v:25:y:2017:i:4:p:711-732 is not listed on IDEAS
    13. Janssen, Maarten & Shelegia, Sandro, 2017. "Beliefs and Consumer Search in a Vertical Industry," MPRA Paper 85134, University Library of Munich, Germany.
    14. Loy, Jens-Peter & Weiss, Christoph R. & Glauben, Thomas, 2016. "Asymmetric cost pass-through? Empirical evidence on the role of market power, search and menu costs," Journal of Economic Behavior & Organization, Elsevier, vol. 123(C), pages 184-192.
    15. Asane-Otoo, Emmanuel & Schneider, Jan, 2015. "Retail fuel price adjustment in Germany: A threshold cointegration approach," Energy Policy, Elsevier, vol. 78(C), pages 1-10.
    16. Obradovits, Martin, 2014. "Asymmetric Pricing Caused by Collusion," MPRA Paper 58889, University Library of Munich, Germany.
    17. Diego Escobari, 2013. "Asymmetric Price Adjustments in Airlines," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 34(2), pages 74-85, March.
    18. Bittmann, Thomas & Holzer, Patrick & Loy, Jens-Peter, 2016. "Seasonal Cost Pass-Through In The German Milk Market," 56th Annual Conference, Bonn, Germany, September 28-30, 2016 244779, German Association of Agricultural Economists (GEWISOLA).
    19. Maarten Janssen & Sandro Shelegia, 2018. "Beliefs and Consumer Search in a Vertical Industry," Working Papers 1033, Barcelona Graduate School of Economics.
    20. Frieder Mokinski & Nikolas Wölfing, 2014. "The effect of regulatory scrutiny: Asymmetric cost pass-through in power wholesale and its end," Journal of Regulatory Economics, Springer, vol. 45(2), pages 175-193, April.
    21. Heim, Sven, 2016. "Rockets and feathers: Asymmetric pricing and consumer search - Evidence from electricity retailing," ZEW Discussion Papers 16-070, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    22. Riemer P. Faber, 2015. "More New Evidence on Asymmetric Gasoline Price Responses," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    23. repec:eee:joecas:v:15:y:2017:i:c:p:64-75 is not listed on IDEAS

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