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

33 Pages Posted: 16 Mar 2012

See all articles by Thomas A. Eife

Thomas A. Eife

Heidelberg University - Alfred Weber Institute for Economics

Erwan Gautier

Banque de France - Centre de Recherche

Nicoletta Berardi

Banque de France - Economic Study and Research Division

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2012

Abstract

This paper studies firms' price-setting decision during a currency changeover. Buyers' difficulties with the new nominal price level create incentives to raise prices temporarily but doing so comes at the risk of damaging a seller's reputation in the long run. We model firms' trade-off and study under which conditions increasing or decreasing prices is optimal. A key variable in the decision is buyers' information about a firm's conversion, which in turn is affected by (i) a firm's size, (ii) the proportion of regular buyers, and (iii) the visibility of a good's price. Difference-in-differences analyses based on micro-data of French restaurants strongly support the model's predictions empirically. Indeed, prices around the 2002 changeover in the European Monetary Union are less likely to rise in larger and non-tourist restaurants, especially when prices are advertised.

Keywords: Price setting, changeover, euro, inflation

JEL Classification: E31, F33, M39

Suggested Citation

Eife, Thomas Albert and Gautier, Erwan and Berardi, Nicoletta, Optimal Price Setting During a Currency Changeover: Theory and Evidence from French Restaurants (March 1, 2012). Banque de France Working Paper No. 371. Available at SSRN: https://ssrn.com/abstract=2023084 or http://dx.doi.org/10.2139/ssrn.2023084

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

Nicoletta Berardi (Contact Author)

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

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

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