A Search Theory of Rigid Prices

Guido Menzio

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: In this paper, I build a model marketplace populated by a finite number of sellers – each producing its own variety of the good – and a continuum of buyers–each searching for a variety he likes. Using the model, I study the response of a seller’s price to privately observed fluctuations in its idiosyncratic production cost. I find that the qualitative properties of this response critically depend on the persistence of the production cost. In particular, if the cost is i.i.d., the seller’s price does not respond at all. If the cost is somewhat persistent, the seller’s price responds slowly and incompletely. If the cost is very persistent, the seller’s price adjusts instantaneously and efficiently to all fluctuations in productivity. I argue that these findings can explain why the monthly frequency of a price change is so much lower for processed than for raw goods.

Keywords: Search Frictions; Asymmetric Information; Rigid Prices; Sticky Prices (search for similar items in EconPapers)
JEL-codes: D83 L11 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2007-03-01
New Economics Papers: this item is included in nep-com and nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:07-031

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