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Search, Sticky Prices, and Inflation

  • Peter A. Diamond

This paper examines equilibrium in a market with free entry where consumers search and firms set prices on individual units of the commodity. The prices attached to newly produced goods are continuously adjusted. Prices attached to previously produced goods can only be changed at a cost. Thus, inflation reduces the real price of goods in inventory awaiting sale. The presence of previously priced goods lowers the reservation price of customers. Thus, inflation cut s into the market power created by the need to search for the good. Consumer welfare is inverse U-shaped in inflation with a strictly positive optimal inflation rate. Copyright 1993 by The Review of Economic Studies Limited.

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Paper provided by Massachusetts Institute of Technology (MIT), Department of Economics in its series Working papers with number 509.

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Date of creation: Dec 1988
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Handle: RePEc:mit:worpap:509
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