A Dynamic Model of Price Signaling, Consumer Learning, and Price Adjustment

Matthew Osborne and Adam Shapiro

No 2014-27, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: We examine a model of consumer learning and price signaling where price and quality are optimally chosen by a monopolist. We find that price signaling causes the firm to raise prices, lower quality, and dampen the degree to which it passes on cost shocks to price. We identify two mechanisms through which signaling affects pass-through and find that signaling can lead to asymmetric pass-through.

Pages: 46 pages
Date: 2014-11-22
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DOI: 10.24148/wp2014-27

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