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Optimally sticky prices: Foundations

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  • L’Huillier, Jean-Paul
  • Zame, William R.

Abstract

We propose a strategic microfoundation for sticky prices. We model an environment in which a firm has better information than its consumers and show that, when many consumers are uninformed, it is optimal for the firm to offer sticky contracts or sticky prices. We establish this result in a general mechanism design framework that allows for non-linear pricing and screening. A virtue of our microfoundation is that it is compatible with a dynamic general equilibrium model. We then discuss the implications of this microfounded friction for welfare.

Suggested Citation

  • L’Huillier, Jean-Paul & Zame, William R., 2022. "Optimally sticky prices: Foundations," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).
    • Handle: RePEc:eee:dyncon:v:141:y:2022:i:c:s0165188922001038
    DOI: 10.1016/j.jedc.2022.104397
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    More about this item

    Keywords

    Sticky prices; Frictions; Pricing policies; Optimal mechanisms;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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