Business as Usual: A Consumer Search Theory of Sticky Prices and Asymmetric Price Adjustment

31 Pages Posted: 10 Aug 2011

See all articles by Luis M. B. Cabral

Luis M. B. Cabral

University of Navarra, IESE Business School; New York University (NYU)

Arthur Fishman

Bar-Ilan University - Department of Economics

Date Written: January 1, 2011

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.

Suggested Citation

B. Cabral, Luis M. and Fishman, Arthur, Business as Usual: A Consumer Search Theory of Sticky Prices and Asymmetric Price Adjustment (January 1, 2011). Bar-Ilan University Department of Economics Research Paper No. 2011-01, Available at SSRN: https://ssrn.com/abstract=1907658 or http://dx.doi.org/10.2139/ssrn.1907658

Luis M. B. Cabral (Contact Author)

University of Navarra, IESE Business School

Avenida Pearson 21
Barcelona, 08034
Spain

New York University (NYU)

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Arthur Fishman

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 52900
Israel
972-3-531-8366 (Phone)
972 3 535 3180 (Fax)

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