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Rationally Inattentive Seller: Sales and Discrete Pricing

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  • Filip Matějka

Abstract

Prices tend to remain constant for a period of time and then jump. In the literature, this "rigidity" is usually interpreted to reflect a cost of adjusting prices. This article shows that price rigidity can alternatively reflect optimal price setting when there are no adjustment costs, namely, if the seller is rationally inattentive. The model generates non-trivial pricing patterns that are consistent with the data and that are hard to explain with the traditional adjustment-cost model. In particular, prices are adjusted frequently but move back and forth between a few given values, hazard functions are downward sloping, and responses to persistent shocks are sluggish. These results are obtained in a model that implements rational inattention without simplifying assumptions on the functional forms of the processed signals.

Suggested Citation

  • Filip Matějka, 2016. "Rationally Inattentive Seller: Sales and Discrete Pricing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(3), pages 1125-1155.
    • Handle: RePEc:oup:restud:v:83:y:2016:i:3:p:1125-1155.
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    File URL: http://hdl.handle.net/10.1093/restud/rdv049
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    1. Patrick J. Kehoe & Virgiliu Midrigan, 2007. "Sales and the real effects of monetary policy," Working Papers 652, Federal Reserve Bank of Minneapolis.
    2. Nakamura, Emi & Steinsson, Jón, 2011. "Price setting in forward-looking customer markets," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 220-233.
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    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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