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Consumers' Imperfect Information and Price Rigidities

  • Jean-Paul L'Huillier

    (EIEF)

This paper develops a model of price rigidities and information diffusion in decentralized markets with private information. First, I provide a strategic microfoundation for price rigidities, by showing that firms are better off delaying the adjustment of prices when they face a high number of uninformed consumers. Second, in an environment where consumers learn from firms' prices, the diffusion of information follows a Bernoulli differential equation. Therefore, learning follows nonlinear dynamics. Third, the price rigidity produces an informational externality that affects welfare. Fourth, the dynamics of output are hump-shaped due to consumer learning.

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File URL: http://www.eief.it/files/2012/09/wp-09-consumers-imperfect-information-and-price-rigidities.pdf
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Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1209.

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Length: 55 pages
Date of creation: 2012
Date of revision: Aug 2012
Handle: RePEc:eie:wpaper:1209
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