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Bargaining, fairness, and price rigidity in a DSGE environment

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  • David M. Arseneau
  • Sanjay K. Chugh

Abstract

A growing body of evidence suggests that an important reason why firms do not change prices nearly as much as standard theory predicts is out of concern for disrupting ongoing customer relationships because price changes may be viewed as "unfair". Existing models that try to capture this concern regarding price-setting are all based on goods markets that are fundamentally Walrasian. In Walrasian goods markets, transactions are spot, making the idea of ongoing customer relationships somewhat difficult to understand. We develop a simple dynamic general equilibrium model of a search-based goods market to make precise the notion of a customer as a repeat buyer at a particular location. In this environment, the transactions price plays a distributive role as well as an allocative role. We exploit this distributive role of prices to explore how concerns for fairness influence price dynamics. Using pricing schemes with bargaining-theoretic foundations, we show that the particular way in which a "fair" outcome is determined matters for price dynamics. The most stark result we find is that complete price stability can arise endogenously. There are issues about which models based on standard Walrasian goods markets are silent.

Suggested Citation

  • David M. Arseneau & Sanjay K. Chugh, 2007. "Bargaining, fairness, and price rigidity in a DSGE environment," International Finance Discussion Papers 900, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:900
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Hjalmarsson, Erik, 2008. "Interpreting long-horizon estimates in predictive regressions," Finance Research Letters, Elsevier, pages 104-117.
    2. Mathä, Thomas Y. & Pierrard, Olivier, 2011. "Search in the product market and the real business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 35(8), pages 1172-1191, August.
    3. David M. Arseneau & Ryan Chahrour & Sanjay K. Chugh & Alan Finkelstein Shapiro, 2015. "Optimal Fiscal and Monetary Policy in Customer Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(4), pages 617-672, June.
    4. Mirko Abbritti, 2012. "Product Market Frictions, Bargaining and Pass-Through," Faculty Working Papers 19/12, School of Economics and Business Administration, University of Navarra.
    5. Luca Tiberti & Marco Tiberti, 2015. "Rural Policies, Price Change and Poverty in Tanzania: An Agricultural Household Model-Based Assessment," Journal of African Economies, Centre for the Study of African Economies (CSAE), pages 193-229.

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    Keywords

    Prices ; Customer relations;

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