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Product Cycles and Prices:Search Foundation

Mei Dong and Yuki Teranishi ()
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Mei Dong: University of Melbourne

No 80, UTokyo Price Project Working Paper Series from University of Tokyo, Graduate School of Economics

Abstract: This paper develops a price model with a search foundation based on product cycles and prices. Observations conclude that firms match with a new product, then set a new price through negotiation and fix the price until the product exits from a market. This evident behavior results in a new model of price stickiness as a Search-based Phillips curve. The model includes a New Keynesian Phillips curve with Calvo's price adjustment as a special case and describes new phenom- ena. First, new parameters and variables of a frictional goods market determine price dynamics. As separation rate in a goods market decreases, price becomes more sticky, i.e., a flatter slope in a Search-based Phillips curve, since the product turnover cycle is sluggish. Moreover, other goods market features, such as proba- bility of match, elasticity of match, and bargaining power for a price setting decide price dynamics. Second, goods market friction can make endogenously persistent inflation dynamics without an assumption of indexation to a lagged inflation rate. Third, when the number of a product persistently increases, deflation continues for a long period. It can explain a secular deflation.

Keywords: Phillips curve; search and matching; product chain (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2018-02
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Working Paper: Product Cycle and Prices: a Search Foundation (2019) Downloads
Working Paper: Product Cycles and Prices:Search Foundation (2017) Downloads
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