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The Role of Prevailing Prices and Wages in the Efficient Organization of Markets

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  • Robert E. Hall

Abstract

Among the ways a product or labor market might operate is the following: All firms quote the same price or wage. Customers or job-seekers search among sellers until they find one willing to sell them or employ them. They do not need to consider the possibility that another seller or employer might offer a better deal, since all offers are identical, under prevailing prices or wages, the small participants in the market -- customers and workers -- have very limited responsibilities for processing information. By contrast, where markets are equilibrated by conscious search for the best price or wage, the small participants face complex problems of gathering and interpreting information. Adherence to prevailing prices and wages may explain part of the macroeconomic puzzle of price and wage stickiness and the sensitivity of real variables to nominal disturbances.

Suggested Citation

  • Robert E. Hall, 1979. "The Role of Prevailing Prices and Wages in the Efficient Organization of Markets," NBER Working Papers 0386, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0386
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    References listed on IDEAS

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    1. Rothschild, Michael, 1974. "Searching for the Lowest Price When the Distribution of Prices Is Unknown," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 689-711, July/Aug..
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    3. Franco Modigliani, 1977. "The monetarist controversy; or, should we forsake stabilization policies?," Economic Review, Federal Reserve Bank of San Francisco, issue Spr suppl, pages 27-46.
    4. Barro, Robert J., 1976. "Rational expectations and the role of monetary policy," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 1-32, January.
    5. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    6. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March.
    7. Michael Rothschild, 1974. "Searching for the Lowest Price When the Distribution of Prices Is Unknown: A Summary," NBER Chapters,in: Annals of Economic and Social Measurement, Volume 3, number 1, pages 293-294 National Bureau of Economic Research, Inc.
    8. Martin Neil Baily, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 37-50.
    9. Phelps, Edmund S & Taylor, John B, 1977. "Stabilizing Powers of Monetary Policy under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 163-190, February.
    10. Kohn, Meir G. & Shavell, Steven, 1974. "The theory of search," Journal of Economic Theory, Elsevier, vol. 9(2), pages 93-123, October.
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