Customer Anger at Price Increases, Time Variation in the Frequency of Price Changes and Monetary Policy
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This article developed a model where consumers care about the fairness of prices and react negatively only when they become convinced that prices are unfair, which leads to price rigidity, though the implications of the model are not identical to those of existing models of costly price adjustment.Abstract:
While much evidence suggests tha price rigidity is due to a concern with the reaction of customers, price increases do not seem to be typically associated with drastic reduction in purchases. To explain this apparent inconsistency, this paper develops a model where consumers care about the fairness of prices and react negatively only when they become convinced that prices are unfair. This leads to price rigidity, though the implications of the model are not identical to those of existing models of costly price adjustment. In particular, the frequency of price adjustment ought to depend on economy-wide variables observed by consumers. As I show, this has implications for the effects of monetary policy. It can, in particular, explain why inflation does not fall immediately after a monetary tightening.read more
Citations
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Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets
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Price Setting during Low and High Inflation: Evidence from Mexico
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Price Setting in France: New Evidence from Survey Data
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The Kinked Demand Curve and Price Rigidity: Evidence from Scanner Data
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Why are prices sticky? the dynamics of wholesale gasoline prices
TL;DR: The authors argue that price stickiness arises from strategic considerations of how customers and competitors will react to price changes, and they find that this prediction is broadly consistent with the behavior of nine Philadelphia gasoline wholesalers.
References
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Staggered prices in a utility-maximizing framework
TL;DR: In this article, the authors developed a model of staggered prices along the lines of Phelps (1978) and Taylor (1979, 1980), but utilizing an analytically more tractable price-setting technology.
Posted Content
Incorporating Fairness into Game Theory and Economics
TL;DR: In this article, it is shown that every mutual-max or mutual-min Nash equilibrium is a fairness equilibrium, and that if payoffs are small, fairness equilibria are roughly the set of mutualmax and mutualmin outcomes; if payoff are large, fairness equilibrium are roughly a set of Nash equilibra.
Journal ArticleDOI
Expectations and the neutrality of money
TL;DR: In this article, the authors provide a simple example of an economy in which equilibrium prices and quantities exhibit what may be the central feature of the modern business cycle: a systematic relation between the rate of change in nominal prices and the level of real output.
Posted Content
Fairness as a Constraint on Profit Seeking: Entitlements in the Market
TL;DR: In customer or labor markets, it is acceptable for a firm to raise prices (or cut wages) when profits are threatened, and to maintain prices when costs diminish as mentioned in this paper, and several market anomalies are explained by assuming that these standards of fairness influence the behavior of firms.
Posted Content
Nominal rigidities and the dynamic effects of a shock to monetary policy
TL;DR: The authors present a model embodying moderate amounts of nominal rigidities which accounts for the observed inertia in inflation and persistence in output, and the key features of their model are those that prevent a sharp rise in marginal costs after an expansionary shock to monetary policy.