Information and Barometric Prices: An Explanation for Price Stickiness

Lörtscher, Simon; Manz, Michael (June 2002). Information and Barometric Prices: An Explanation for Price Stickiness (Diskussionsschriften 02-06). Bern: Universität Bern Volkswirtschaftlicher Institut

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Price stickiness plays a decisive role in many macroeconomic models, yet why prices are sticky remains a puzzle. We develop a microeconomic model in which two competing firms are free to set prices, but face uncertainty about the state of demand. With some probability, there is a positive demand shock, which is observed but by one firm. In equilibrium, only the informed firm adjusts its price after the shock, while the uninformed firm raises its price only with a delay, after observing the price of its competitor. Hence, prices are sticky in the sense that one firmís price does not adjust immediately. Further, if getting information is costly, the model implies that the larger firm tends to be better informed and to adjust its price first.

Item Type:

Working Paper

Division/Institute:

03 Faculty of Business, Economics and Social Sciences > Department of Economics
03 Faculty of Business, Economics and Social Sciences > Department of Economics > Institute of Economics

UniBE Contributor:

Lörtscher, Simon

Subjects:

300 Social sciences, sociology & anthropology > 330 Economics

Series:

Diskussionsschriften

Publisher:

Universität Bern Volkswirtschaftlicher Institut

Language:

English

Submitter:

Aline Lehnherr

Date Deposited:

23 Apr 2020 10:48

Last Modified:

06 Aug 2020 14:18

JEL Classification:

L16, D43, D82

BORIS DOI:

10.7892/boris.142915

URI:

https://boris.unibe.ch/id/eprint/142915

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