Information and Barometric Prices: An Explanation for Price Stickiness
Price stickiness plays a decisive role in many macroeconomic models, yet why prices are sticky remains a puzzle. We develop a microeconomic model in which two competing firms are free to set prices, but face uncertainty about the state of demand. With some probability, there is a positive demand shock, which is observed but by one firm. In equilibrium, only the informed firm adjusts its price after the shock, while the uninformed firm raises its price only with a delay, after observing the price of its competitor. Hence, prices are sticky in the sense that one firm's price does not adjust immediately. Further, if getting information is costly, the model implies that the larger firm tends to be better informed and to adjust its price first.
|Date of creation:||Jun 2002|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 0041 31 631 45 06
Fax: 41 31 631 37 83
Web page: http://www.vwi.unibe.ch/content/publikationen/index_eng.html
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Laurence Ball & N. Gregory Mankiw, 1994.
"A sticky-price manifesto,"
Federal Reserve Bank of Dallas, issue Apr.
- Ball, Laurence & Mankiw, N. Gregory, 1994. "A sticky-price manifesto," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 127-151, December.
- Cooper, David J., 1997. "Barometric price leadership," International Journal of Industrial Organization, Elsevier, vol. 15(3), pages 301-325, May.
- David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
- Laurence Ball & David Romer, 1987.
"Sticky Prices as Coordination Failure,"
NBER Working Papers
2327, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:ube:dpvwib:dp0206. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Silvia Glusstein-Gerber)
If references are entirely missing, you can add them using this form.