State-Dependent Pricing under Infrequent Information: A Unified Framework

45 Pages Posted: 12 May 2010 Last revised: 14 May 2011

See all articles by Marco Bonomo

Marco Bonomo

Insper Institute of Education and Research

Carlos Carvalho

Asset 1 Investment Company; Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics

René Garcia

Université de Montréal - CIREQ - Département de sciences économiques; University of Montreal

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Date Written: September 30, 2010

Abstract

We characterize optimal state-dependent pricing rules under various forms of infrequent information. In all models, infrequent price changes arise from the existence of a lump-sum "menu cost." We entertain various alternatives for the source and nature of infrequent information. In two benchmark cases with continuously available information, optimal pricing rules are purely state-dependent. In contrast, in all environments with infrequent information, optimal pricing rules are both time- and state-dependent, characterized by "trigger strategies" that depend on the time elapsed since the last date when information was fully factored into the pricing decision. After considering the case in which information arrives infrequently for exogenous reasons, we address pricing problems in which gathering and processing information also entails a lump-sum cost. When the information and adjustment costs must be incurred simultaneously, the optimal pricing policy is a fixed-price time-dependent rule. When the costs are dissociated, the optimal rule features price stickiness and inattentiveness. Finally, we consider versions of the price-setting problems in which firms continuously entertain partial information. We characterize the optimal pricing rules and provide numerical solution algorithms and examples in a unified framework.

Keywords: menu costs, information costs, infrequent information, sticky information, inattentiveness, optimal price setting, state-dependent pricing, time-dependent pricing

JEL Classification: E00, E31

Suggested Citation

Bonomo, Marco and Carvalho, Carlos and Garcia, René, State-Dependent Pricing under Infrequent Information: A Unified Framework (September 30, 2010). Available at SSRN: https://ssrn.com/abstract=1604826 or http://dx.doi.org/10.2139/ssrn.1604826

Marco Bonomo

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil

Carlos Carvalho (Contact Author)

Asset 1 Investment Company ( email )

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São Paulo, São Paulo
Brazil

HOME PAGE: http://www.asset1.com.br

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

HOME PAGE: http://https://sites.google.com/site/cvianac2/carloscarvalho

René Garcia

Université de Montréal - CIREQ - Département de sciences économiques ( email )

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Montreal, Quebec H3C 3J7
Canada
514-985-4014 (Phone)

University of Montreal ( email )

United States

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