Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/96067
Authors: 
Cabral, Luís
Fishman, Arthur
Year of Publication: 
2010
Series/Report no.: 
Working Papers, Bar-Ilan University, Department of Economics 2011-01
Abstract: 
Empirical evidence suggests that prices are sticky with respect to cost changes. Moreover, prices respond more rapidly to cost increases than to cost decreases. We develop a search theoretic model which is consistent with this evidence and allows for additional testable predictions. Our results are based on the assumption that buyers do not observe the sellers costs, but know that cost changes are positively correlated across sellers. In equilibrium, a change in price is likely to induce consumer search, which explains sticky prices. Moreover, the signal conveyed by a price decrease is different from the signal conveyed by a price increase, which explains asymmetry in price adjustment.
Document Type: 
Working Paper

Files in This Item:
File
Size
358.97 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.