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A Theory of Price Inertia

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  • Fishman, Arthur

Abstract

I present a theory of price inertia in a market characterized by dual informational frictions. At the firm specific level, buyers must invest in costly search to learn the price of any seller. At the aggregate level, there is imperfect information about inflation. Thus, knowledge of a particular seller's nominal price only imperfectly conveys its real price. However, buyers can resolve aggregate uncertainty in advance of trade by acquiring additional information from an external source at a small cost. In equilibrium, buyers in fact do become informed. Thus, all market participants are well informed in advance of trade. Nevertheless the equilibrium price of the search good is unresponsive to inflation.

Suggested Citation

  • Fishman, Arthur, 1995. "A Theory of Price Inertia," Foerder Institute for Economic Research Working Papers 275605, Tel-Aviv University > Foerder Institute for Economic Research.
    • Handle: RePEc:ags:isfiwp:275605
    DOI: 10.22004/ag.econ.275605
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    References listed on IDEAS

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