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A Theory of Price Rigidities When Quality is Unobservable

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  • Franklin Allen

Abstract

A theory of price and quantity adjustments in response to stochastic changes in demand is developed for competitive markets. The level of demand is observable but product quality is not. It is shown that the higher the serial correlation of demand, the more rigid are prices and the greater the change in ouputs. If the correlation is low, prices are less rigid than when quality is observable; if it is high, they can be more rigid. Even with downward sloping demand and upward sloping supply curves, prices can be completely rigid.

Suggested Citation

  • Franklin Allen, 1988. "A Theory of Price Rigidities When Quality is Unobservable," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(1), pages 139-151.
    • Handle: RePEc:oup:restud:v:55:y:1988:i:1:p:139-151.
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    File URL: http://hdl.handle.net/10.2307/2297534
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    Cited by:

    1. Lünnemann, Patrick & Wintr, Ladislav, 2006. "Are internet prices sticky?," Working Paper Series 645, European Central Bank.
    2. Lourdes Martín & Diego Rodríguez, 2004. "Pricing to market at firm level," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 140(2), pages 302-320, June.
    3. Dexter, Albert S. & Levi, Maurice D. & Nault, Barrie R., 2002. "Sticky prices: the impact of regulation," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 797-821, May.
    4. Silvia Fabiani & Angela Gattulli & Roberto Sabbatini, 2003. "La rigidità dei prezzi in Italia," Moneta e Credito, Economia civile, vol. 56(223), pages 325-358.
    5. Hillen, Judith & Fedoseeva, Svetlana, 2021. "E-commerce and the end of price rigidity?," Journal of Business Research, Elsevier, vol. 125(C), pages 63-73.
    6. Weinrich, Gerd, 1997. "Endogenous Fixprices and Sticky Price Adjustment of Risk-averse Firms," MPRA Paper 6302, University Library of Munich, Germany.
    7. Anthony Yates, 1998. "Downward nominal rigidity and monetary policy," Bank of England working papers 82, Bank of England.
    8. Michael J. Hicks, 2007. "Hierarchical delays as a source of nominal price rigidities: evidence from the microcomputer industry," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 803-815.
    9. Gerd Weinrich, 1997. "Endogenous fixprices and sticky price adjustment of risk-averse firms," Journal of Economics, Springer, vol. 66(3), pages 283-305, October.
    10. Gu, Gyun Cheol, 2012. "Denial, Rationalization, and the Administered Price Thesis," MPRA Paper 42594, University Library of Munich, Germany.

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