Business as usual: A consumer search theory of sticky prices and asymmetric price adjustment

Luís Cabral, Arthur Fishman

Research output: Contribution to journalArticlepeer-review

46 Scopus citations

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.

Original languageEnglish
Pages (from-to)371-376
Number of pages6
JournalInternational Journal of Industrial Organization
Volume30
Issue number4
DOIs
StatePublished - Jul 2012
Externally publishedYes

Keywords

  • Asymmetric price adjustment
  • Search
  • Sticky prices

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