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Rationally Inattentive Seller: Sales and Discrete Pricing

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  • Filip Matejka

Abstract

This paper presents a model of a rationally inattentive seller responding to shocks to unit input cost. The model generates price series imultaneously exhibiting all three of the following features that can be found in the data. 1) Prices change frequently. 2) Responses of prices to aggregate variables are delayed. 3) Prices move back and forth between a few rigid values. Discrete pricing arises even if the unit input cost varies in a continuous range. Results of the model also agree with the evidence that reductions in price, e.g. sales, are usually short-lasting and that the highest price in a sample tends to be the most quoted price. Discrete and asymmetric pricing is a seller's optimal response to his limited information capacity. Moreover, the model provides rationale for faster responses to aggregate shocks in industries with more volatile idiosyncratic shocks as well as for a steeper Philip's curve in less stable aggregate conditions.

Suggested Citation

  • Filip Matejka, 2010. "Rationally Inattentive Seller: Sales and Discrete Pricing," CERGE-EI Working Papers wp408, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  • Handle: RePEc:cer:papers:wp408
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    References listed on IDEAS

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    1. Patrick J. Kehoe & Virgiliu Midrigan, 2007. "Sales and the real effects of monetary policy," Working Papers 652, Federal Reserve Bank of Minneapolis.
    2. Ricardo Reis, 2006. "Inattentive Producers," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 793-821.
    3. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1295-1328.
    4. Woodford, Michael, 2009. "Information-constrained state-dependent pricing," Journal of Monetary Economics, Elsevier, vol. 56(S), pages 100-124.
    5. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    6. Emi Nakamura & Jon Steinsson, 2005. "Price Setting in a Forward-Looking Customer Market," Macroeconomics 0509010, University Library of Munich, Germany.
    7. Bartosz Mackowiak & Mirko Wiederholt, 2009. "Optimal Sticky Prices under Rational Inattention," American Economic Review, American Economic Association, vol. 99(3), pages 769-803, June.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. James Costain & Anton Nakov, 2013. "Logit price dynamics," Working Papers 1301, Banco de España;Working Papers Homepage.
    2. repec:wly:econjl:v:127:y:2017:i:604:p:2216-2239 is not listed on IDEAS
    3. Luigi Paciello & Mirko Wiederholt, 2014. "Exogenous Information, Endogenous Information, and Optimal Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 81(1), pages 356-388.
    4. Pasten, Ernesto & Schoenle, Raphael, 2016. "Rational inattention, multi-product firms and the neutrality of money," Journal of Monetary Economics, Elsevier, vol. 80(C), pages 1-16.
    5. Costain, James & Nakov, Anton, 2015. "Precautionary price stickiness," Journal of Economic Dynamics and Control, Elsevier, vol. 58(C), pages 218-234.
    6. Fernando E. Alvarez & Francesco Lippi & Luigi Paciello, 2011. "Optimal Price Setting With Observation and Menu Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 126(4), pages 1909-1960.
    7. Bartosz Maćkowiak & Mirko Wiederholt, 2015. "Business Cycle Dynamics under Rational Inattention," Review of Economic Studies, Oxford University Press, vol. 82(4), pages 1502-1532.
    8. Andrew Caplin & John Leahy & Filip Matějka, 2015. "Social Learning and Selective Attention," NBER Working Papers 21001, National Bureau of Economic Research, Inc.
    9. Filip Matêjka & Alisdair McKay, 2015. "Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model," American Economic Review, American Economic Association, vol. 105(1), pages 272-298, January.
    10. repec:eee:inecon:v:112:y:2018:i:c:p:150-165 is not listed on IDEAS
    11. Leonardo Melosi, 2017. "Signalling Effects of Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 84(2), pages 853-884.
    12. Woodford, Michael, 2009. "Information-constrained state-dependent pricing," Journal of Monetary Economics, Elsevier, vol. 56(S), pages 100-124.
    13. Martin Eichenbaum & Nir Jaimovich & Sergio Rebelo & Josephine Smith, 2014. "How Frequent Are Small Price Changes?," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(2), pages 137-155, April.
    14. Christian Hellwig & Sebastian Kohls & Laura Veldkamp, 2012. "Information Choice Technologies," American Economic Review, American Economic Association, vol. 102(3), pages 35-40, May.
    15. LeBlanc, Justin D. & Civelli, Andrea & Deck, Cary & Bregu, Klajdi, 2016. "State dependent price setting rules under implicit thresholds: An experiment," Journal of Economic Dynamics and Control, Elsevier, vol. 68(C), pages 17-44.
    16. Mackowiak, Bartosz Adam & Wiederholt, Mirko, 2011. "Inattention to Rare Events," CEPR Discussion Papers 8626, C.E.P.R. Discussion Papers.
    17. Stevens, Luminita, 2015. "Coarse Pricing Policies," Staff Report 520, Federal Reserve Bank of Minneapolis.
    18. Dasgupta, Kunal & Mondria, Jordi, 2018. "Inattentive importers," Journal of International Economics, Elsevier, vol. 112(C), pages 150-165.
    19. Volker Hahn & Michal Marencak, 2018. "Price Points and Price Dynamics," Working Paper Series of the Department of Economics, University of Konstanz 2018-01, Department of Economics, University of Konstanz.
    20. Gaetano Gaballo, 2016. "Rational Inattention to News: The Perils of Forward Guidance," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(1), pages 42-97, January.
    21. Tim Willems, 2017. "Actively Learning by Pricing: A Model of an Experimenting Seller," Economic Journal, Royal Economic Society, vol. 127(604), pages 2216-2239, September.

    More about this item

    Keywords

    Rational inattention; nominal rigidity; sales;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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