Business as Usual: A Consumer Search Theory of Sticky Prices and Asymmetric Price Adjustment

Luis Cabral and Arthur Fishman (afishman@mail.biu.ac.il)
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Arthur Fishman: Bar-Ilan University

No 2011-01, Working Papers from Bar-Ilan University, Department of Economics

Abstract: Empirical evidence suggests that prices are sticky with respect to cost changes. Moreover, prices respond more rapidly to cost increases than to cost decreases. We develop a search theoretic model which is consistent with this evidence and allows for additional testable predictions. Our results are based on the assumption that buyers do not observe the sellers׳ costs, but know that cost changes are positively correlated across sellers. In equilibrium, a change in price is likely to induce consumer search, which explains sticky prices. Moreover, the signal conveyed by a price decrease is different from the signal conveyed by a price increase, which explains asymmetry in price adjustment.

Date: 2011-01
New Economics Papers: this item is included in nep-cba, nep-com and nep-hme
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Journal Article: Business as usual: A consumer search theory of sticky prices and asymmetric price adjustment (2012)
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