Intertemporal pricing in markets with differential information

Aldo Rustichini and Anne P. Villamil
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Anne P. Villamil: Department of Economics, University of Illinois, Champaign, IL 61820, USA

Economic Theory, 1996, vol. 8, issue 2, 227 pages

Abstract: This paper provides a theory of intertemporal pricing in a small market with differential information about the realizations of a stochastic process which determines demand. We study the sequential equilibria in stationary strategies of the stochastic game between a seller and buyer. The seller has zero cost of producing one unit of a non-durable good in all market periods. The buyer's value for the good is a random variable governed by a simple Markov process. At the beginning of each period the unit's value is determined by nature and is privately revealed to the buyer. The seller posts a single price offer each period, which the buyer either accepts or rejects. Only two types of price paths emerge in equilibrium: either prices are constant, or they have persistent cycles between a low and a high value. In both cases, however, prices are "sticky" in the sense that changes in price are less frequent than changes in the economy's fundamentals.

JEL-codes: C61 D40 D82 D83 L16 (search for similar items in EconPapers)
Date: 1996
Note: Received: January 3, 1995; Accepted: August 4, 1995
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