Optimal Price Setting During a Currency Changeover: Theory and Evidence from French Restaurants

Nicoletta Berardi, Thomas Eife () and Erwan Gautier

Working papers from Banque de France

Abstract: This paper studies firms' price-setting decision during a currency changeover. Buyers' difficulties with the new nominal price level create incentives to raise prices temporarily but doing so comes at the risk of damaging a seller's reputation in the long run. We model firms' trade-off and study under which conditions increasing or decreasing prices is optimal. A key variable in the decision is buyers' information about a firm's conversion, which in turn is affected by (i) a firm's size, (ii) the proportion of regular buyers, and (iii) the visibility of a good's price. Difference-in-differences analyses based on micro-data of French restaurants strongly support the model's predictions empirically. Indeed, prices around the 2002 changeover in the European Monetary Union are less likely to rise in larger and non-tourist restaurants, especially when prices are advertised.

Keywords: Price setting; changeover; euro; inflation. (search for similar items in EconPapers)
JEL-codes: E31 F33 M39 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2012
New Economics Papers: this item is included in nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Optimal price setting during a currency changeover: theory and evidence from french restaurants (2014)
Working Paper: Optimal price setting during a currency changeover: theory and evidence from french restaurants (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:371

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