Rationally inattentive seller: sales and discrete pricing

0342781 - NHÚ 2011 RIV CZ eng J - Journal Article
Matějka, Filip
Rationally inattentive seller: sales and discrete pricing.
CERGE-EI Working Paper Series. Roč. 20, č. 1 (2010), s. 89-146. ISSN 1211-3298
R&D Projects: GA MŠMT LC542
Institutional research plan: CEZ:AV0Z70850503
Keywords : rational inattention * nominal rigidity * sales
Subject RIV: AH - Economics
http://www.cerge-ei.cz/pdf/wp/Wp408.pdf

This paper presents a model of a rationally inattentive seller responding to shocks to unit input cost. The model generates price series simultaneously 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.
Permanent Link: http://hdl.handle.net/11104/0185414