Rationally Inattentive Seller: Sales and Discrete Pricing

CERGE-EI Working Paper Series No. 408

58 Pages Posted: 6 Aug 2010

See all articles by Filip Matějka

Filip Matějka

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Date Written: March 1, 2010

Abstract

This paper presents a model of a rationally inattentive seller responding to shocks to unit input cost. The model generates price series imultaneously exhibiting all three of the following features that can be found in the data. 1) Prices change frequently. 2) Responses of prices to aggregate variables are delayed. 3) Prices move back and forth between a few rigid values. Discrete pricing arises even if the unit input cost varies in a continuous range. Results of the model also agree with the evidence that reductions in price, e.g. sales, are usually short-lasting and that the highest price in a sample tends to be the most quoted price. Discrete and asymmetric pricing is a seller's optimal response to his limited information capacity. Moreover, the model provides rationale for faster responses to aggregate shocks in industries with more volatile idiosyncratic shocks as well as for a steeper Philip's curve in less stable aggregate conditions.

Keywords: rational inattention, nominal rigidity, sales

JEL Classification: D8, E3

Suggested Citation

Matějka, Filip, Rationally Inattentive Seller: Sales and Discrete Pricing (March 1, 2010). CERGE-EI Working Paper Series No. 408, Available at SSRN: https://ssrn.com/abstract=1653308 or http://dx.doi.org/10.2139/ssrn.1653308

Filip Matějka (Contact Author)

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

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