Pricing when Customers Care about Fairness but Misinfer Markups

Erik Eyster, Kristof Madarasz and Pascal Michaillat

No 23778, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper proposes a theory of price rigidity consistent with survey evidence that firms stabilize prices out of fairness to their consumers. The theory relies on two psychological assumptions. First, customers care about the fairness of prices: fixing the price of a good, consumers enjoy it more at a low markup than at a high markup. Second, customers underinfer marginal costs from prices: when prices rise due to an increase in marginal costs, customers underappreciate the increase in marginal costs and partially misattribute higher prices to higher markups. Firms anticipate customers’ reaction and trim their price increases. Hence, the passthrough of marginal costs into prices falls short of one—prices are somewhat rigid. Embedded in a simple macroeconomic model, our pricing theory produces nonneutral monetary policy, a short-run Phillips curve that involves both past and future inflation rates, a hump-shaped impulse response of output to monetary policy, and a nonvertical long-run Phillips curve.

JEL-codes: D21 D42 E03 E52 L11 (search for similar items in EconPapers)
Date: 2017-09
New Economics Papers: this item is included in nep-com, nep-ind and nep-mac
Note: IO ME
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Citations: View citations in EconPapers (6)

Published as Erik Eyster, Kristof Madarasz, & Pascal Michaillat. "Pricing Under Fairness Concerns," Journal of the European Economic Association, Volume 19, Issue 3, June 2021, Pages 1853–1898

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