The Informativeness of Prices: Search with Learning and Cost Uncertainty

46 Pages Posted: 7 Aug 2007 Last revised: 24 Jun 2010

See all articles by Roland Bénabou

Roland Bénabou

Princeton University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Robert H. Gertner

University of Chicago - Finance; National Bureau of Economic Research (NBER)

Date Written: September 1991

Abstract

Aggregate cost uncertainty, arising from real shocks or unanticipated inflation, reduces the informativeness of prices by scrambling relative and aggregate variations. But when agents can acquire additional information, such increased noise may in fact lead them to become better informed, and price competition will intensify. We examine these issues in a model of search with learning, where consumers search optimally from an unknown price distribution while firms price optimally given consumers' search rules. We show that the decisive factor in whether inflation variability increases or reduces the incentive to search, and thereby market efficiency, is the size of informational costs.

Suggested Citation

Bénabou, Roland and Gertner, Robert H., The Informativeness of Prices: Search with Learning and Cost Uncertainty (September 1991). NBER Working Paper No. w3833. Available at SSRN: https://ssrn.com/abstract=473971

Roland Bénabou (Contact Author)

Princeton University - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Robert H. Gertner

University of Chicago - Finance ( email )

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National Bureau of Economic Research (NBER)

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