Consumers' Imperfect Information and Price Rigidities

Jean-Paul L'Huillier

No 1209, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: This paper develops a model of price rigidities and information diffusion in decentralized markets with private information. First, I provide a strategic microfoundation for price rigidities, by showing that firms are better off delaying the adjustment of prices when they face a high number of uninformed consumers. Second, in an environment where consumers learn from firms' prices, the diffusion of information follows a Bernoulli differential equation. Therefore, learning follows nonlinear dynamics. Third, the price rigidity produces an informational externality that affects welfare. Fourth, the dynamics of output are hump-shaped due to consumer learning.

Pages: 55 pages
Date: 2012, Revised 2012-08
New Economics Papers: this item is included in nep-com, nep-cta, nep-dge and nep-mkt
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Related works:
Working Paper: Consumers' Imperfect Information and Price Rigidities (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eie:wpaper:1209

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