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A Search Theory of Rigid Prices

Author

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  • Guido Menzio

    () (Department of Economics, University of Pennsylvania)

Abstract

In this paper, I build a model marketplace populated by a finite number of sellers – each producing its own variety of the good – and a continuum of buyers–each searching for a variety he likes. Using the model, I study the response of a seller’s price to privately observed fluctuations in its idiosyncratic production cost. I find that the qualitative properties of this response critically depend on the persistence of the production cost. In particular, if the cost is i.i.d., the seller’s price does not respond at all. If the cost is somewhat persistent, the seller’s price responds slowly and incompletely. If the cost is very persistent, the seller’s price adjusts instantaneously and efficiently to all fluctuations in productivity. I argue that these findings can explain why the monthly frequency of a price change is so much lower for processed than for raw goods.

Suggested Citation

  • Guido Menzio, 2007. "A Search Theory of Rigid Prices," PIER Working Paper Archive 07-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  • Handle: RePEc:pen:papers:07-031
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    File URL: http://economics.sas.upenn.edu/system/files/working-papers/07-031.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. François Gourio & Leena Rudanko, 2014. "Customer Capital," Review of Economic Studies, Oxford University Press, vol. 81(3), pages 1102-1136.
    2. Luigi Paciello & Andrea Pozzi & Nicholas Trachter, 2013. "Price Dynamics with Customer Markets," EIEF Working Papers Series 1328, Einaudi Institute for Economics and Finance (EIEF), revised Dec 2017.
    3. Cabral, Luís & Fishman, Arthur, 2012. "Business as usual: A consumer search theory of sticky prices and asymmetric price adjustment," International Journal of Industrial Organization, Elsevier, vol. 30(4), pages 371-376.
    4. Pau Roldan & Sophia Gilbukh, 2017. "Firm Dynamics and Pricing under Customer Capital Accumulation," 2017 Meeting Papers 1235, Society for Economic Dynamics.
    5. Edmond, Chris & Veldkamp, Laura, 2009. "Income dispersion and counter-cyclical markups," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 791-804, September.
    6. Laura Veldkamp & Chris Edmond, 2006. "Income Dispersion, Asymmetric Information and Fluctuations in Market Efficiency," Working Papers 06-13, New York University, Leonard N. Stern School of Business, Department of Economics.
    7. 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.).
    8. Nicholas Trachter & Andrea Pozzi & Luigi Paciello, 2014. "Markups Dynamics with Customer Markets," 2014 Meeting Papers 39, Society for Economic Dynamics.

    More about this item

    Keywords

    Search Frictions; Asymmetric Information; Rigid Prices; Sticky Prices;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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