Optimal Price Setting During a Currency Changeover: Theory and Evidence from French Restaurants

41 Pages Posted: 11 Mar 2012 Last revised: 23 Feb 2013

See all articles by Nicoletta Berardi

Nicoletta Berardi

Banque de France - Economic Study and Research Division

Thomas A. Eife

Heidelberg University - Alfred Weber Institute for Economics

Erwan Gautier

Banque de France - Centre de Recherche

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2013

Abstract

This paper studies firms' price-setting decision during a currency changeover. Buyers' difficulties with the new nominal price level may create incentives to raise prices temporarily but doing so comes at the risk of damaging a seller's standing as a fair trader. We model firms' trade-off and study under which conditions increasing or decreasing prices is optimal. A difference-in-differences analysis based on micro-data of French restaurants strongly supports the model's predictions. Prices during the 2002 changeover in the European Monetary Union were less likely to rise in larger restaurants, non-tourist restaurants, and when prices were advertised.

Keywords: price setting, changeover, Euro, inflation

JEL Classification: E31, F33, M39

Suggested Citation

Berardi, Nicoletta and Eife, Thomas Albert and Gautier, Erwan, Optimal Price Setting During a Currency Changeover: Theory and Evidence from French Restaurants (February 1, 2013). Available at SSRN: https://ssrn.com/abstract=2019975 or http://dx.doi.org/10.2139/ssrn.2019975

Nicoletta Berardi (Contact Author)

Banque de France - Economic Study and Research Division ( email )

31, rue Croix des Petits Champs
75049 Paris Cedex 01
FRANCE

Thomas Albert Eife

Heidelberg University - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

Erwan Gautier

Banque de France - Centre de Recherche ( email )

31 rue Croix des Petits Champs
75049 Paris Cedex 01
France

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