Consumer Absenteeism, Search, Advertising, and Sticky Prices
This paper shows that prices may be sticky when buyers must search to determine the current market price and there is uncertainty about the expected duration of cost changes. Speci cally, during periods when costs, and hence prices are high, low valuation consumers optimally stop searching and consequently are uninformed about price changes. Then, when costs go down, sellers must advertise to inform those consumers about price cuts. If advertising is costly, relative to single period profit, advertising is profitable only if the cost cut is likely to persist, but not if it is likely to be short lived. Thus, if sellers are initially uncertain about the expected longevity of a cost cut, they might adopt a ‘watch and wait’ strategy, delaying price reductions until better information becomes available. Importantly, it is shown that the same logic does not apply to cost increases. Thus the model is consistent with asymmetric price rigidity (e.g., Peltzman (2000) ).
|Date of creation:||Jan 2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: Phone: +972-3-5318345
Web page: http://www.biu.ac.il/soc/ec
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:biu:wpaper:2012-01. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Department of Economics)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.