IDEAS home Printed from https://ideas.repec.org/p/cer/papers/wp409.html
   My bibliography  Save this paper

Rigid Pricing and Rationally Inattentive Consumer

Author

Listed:
  • Filip Matejka

Abstract

This paper proposes a mechanism leading to rigid pricing as an optimal strategy. It applies a framework of rational inattention to study the pricing strategies of a monopolistic seller facing a consumer with limited information capacity. The consumer needs to process information about prices, while the seller is perfectly attentive. It turns out that the seller chooses to price discretely even for a continuous range of unit input costs, i.e. charges a finite set of different prices only. The price usually stays constant when unit input cost changes only a little. The seller does so to provide the consumer with easily observable prices and thus stimulate her to consume more. In the model's dynamic version, this mechanism implies that prices respond to cost shocks with a delay.

Suggested Citation

  • Filip Matejka, 2010. "Rigid Pricing and Rationally Inattentive Consumer," CERGE-EI Working Papers wp409, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  • Handle: RePEc:cer:papers:wp409
    as

    Download full text from publisher

    File URL: http://www.cerge-ei.cz/pdf/wp/Wp409.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Fabiani, S. & Druant, M. & Hernando, I. & Kwapil, C. & Landau, B. & Loupias, C. & Martins, F. & Mathä, T. & Sabbatini, R. & Stahl, H. & Stockman, A., 2005. "The Pricing Behaviour of Firms in the Euro Area: New Survey Evidence," Working papers 135, Banque de France.
    2. 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.
    3. Sims, Christopher A., 2005. "Rational inattention: a research agenda," Discussion Paper Series 1: Economic Studies 2005,34, Deutsche Bundesbank.
    4. Ricardo Reis, 2006. "Inattentive Producers," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 793-821.
    5. Bartosz Maćkowiak & Mirko Wiederholt, 2015. "Business Cycle Dynamics under Rational Inattention," Review of Economic Studies, Oxford University Press, vol. 82(4), pages 1502-1532.
    6. 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.
    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.
    8. 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.
    9. Nicola Lacetera & Devin G. Pope & Justin R. Sydnor, 2012. "Heuristic Thinking and Limited Attention in the Car Market," American Economic Review, American Economic Association, vol. 102(5), pages 2206-2236, August.
    10. Blinder, Alan S, 1991. "Why Are Prices Sticky? Preliminary Results from an Interview Study," American Economic Review, American Economic Association, vol. 81(2), pages 89-96, May.
    11. Woodford, Michael, 2009. "Information-constrained state-dependent pricing," Journal of Monetary Economics, Elsevier, vol. 56(S), pages 100-124.
    12. repec:hrv:faseco:32116841 is not listed on IDEAS
    13. Silvia Fabiani & Martine Druant & Ignacio Hernando & Claudia Kwapil & Bettina Landau & Claire Loupias & Fernando Martins & Thomas Mathä & Roberto Sabbatini & Harald Stahl & Ad Stokman, 2006. "What Firms' Surveys Tell Us about Price-Setting Behavior in the Euro Area," International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
    14. Eichenbaum, Martin & Jaimovich, Nir & Rebelo, Sérgio, 2008. "Reference Prices and Nominal Rigidities," CEPR Discussion Papers 6709, C.E.P.R. Discussion Papers.
    15. Stijn Van Nieuwerburgh & Laura Veldkamp, 2010. "Information Acquisition and Under-Diversification," Review of Economic Studies, Oxford University Press, vol. 77(2), pages 779-805.
    16. Mondria, Jordi, 2010. "Portfolio choice, attention allocation, and price comovement," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1837-1864, September.
    17. Antonella Tutino, 2013. "Rationally inattentive consumption choices," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(3), pages 421-439, July.
    18. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    19. Luo Yulei & Young Eric R, 2009. "Rational Inattention and Aggregate Fluctuations," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-43, April.
    20. Filip Matejka & Alisdair McKay, 2012. "Simple Market Equilibria with Rationally Inattentive Consumers," American Economic Review, American Economic Association, vol. 102(3), pages 24-29, May.
    21. Gita Gopinath & Roberto Rigobon, 2008. "Sticky Borders," The Quarterly Journal of Economics, Oxford University Press, vol. 123(2), pages 531-575.
    22. Yang, Ming, 2015. "Coordination with flexible information acquisition," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 721-738.
    23. Christopher A. Sims, 2006. "Rational Inattention: Beyond the Linear-Quadratic Case," American Economic Review, American Economic Association, vol. 96(2), pages 158-163, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kristoffer P. Nimark, 2014. "Man-Bites-Dog Business Cycles," American Economic Review, American Economic Association, vol. 104(8), pages 2320-2367, August.
    2. Xavier Gabaix, 2014. "A Sparsity-Based Model of Bounded Rationality," The Quarterly Journal of Economics, Oxford University Press, vol. 129(4), pages 1661-1710.
    3. Saint-Paul, Gilles, 2010. "A "quantum" approach to rational inattention," CEPR Discussion Papers 7739, C.E.P.R. Discussion Papers.
    4. Antonella Tutino, 2013. "Rationally inattentive consumption choices," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(3), pages 421-439, July.
    5. 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.
    6. repec:wly:econjl:v:127:y:2017:i:604:p:2216-2239 is not listed on IDEAS
    7. Mackowiak, Bartosz Adam & Wiederholt, Mirko, 2011. "Inattention to Rare Events," CEPR Discussion Papers 8626, C.E.P.R. Discussion Papers.
    8. Pavan, Alessandro & Vives, Xavier, 2015. "Information, Coordination, and Market Frictions: An Introduction," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 407-426.
    9. Jean-Paul L'Huillier, 2012. "Consumers' Imperfect Information and Price Rigidities," EIEF Working Papers Series 1209, Einaudi Institute for Economics and Finance (EIEF), revised Aug 2012.
    10. 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.
    11. Saint-Paul, Gilles, 2017. "A “quantized” approach to rational inattention," European Economic Review, Elsevier, vol. 100(C), pages 50-71.
    12. 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.
    13. repec:eee:macchp:v2-1065 is not listed on IDEAS

    More about this item

    Keywords

    Rational inattention; nominal rigidity;

    JEL classification:

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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cer:papers:wp409. 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: (Jana Koudelkova). General contact details of provider: http://edirc.repec.org/data/eiacacz.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.