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The Informativeness of Prices: Search With Learning and Cost Uncertainty

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  • Roland Benabou
  • Robert Gertner

Abstract

Aggregate cost uncertainty, arising from real shocks or unanticipated inflation, reduces the informativeness of prices by scrambling relative and aggregate variations. But when agents can acquire additional information, such increased noise may in fact lead them to become better informed, and price competition will intensify. We examine these issues in a model of search with learning, where consumers search optimally from an unknown price distribution while firms price optimally given consumers' search rules. We show that the decisive factor in whether inflation variability increases or reduces the incentive to search, and thereby market efficiency, is the size of informational costs.

Suggested Citation

  • Roland Benabou & Robert Gertner, 1991. "The Informativeness of Prices: Search With Learning and Cost Uncertainty," NBER Working Papers 3833, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3833
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    References listed on IDEAS

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    Cited by:

    1. Ball, Laurence & Romer, David, 2003. "Inflation and the Informativeness of Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(2), pages 177-196, April.
    2. Mariano Tommasi, 1992. "The Welfare Effects of Inflation, The Consequences of Price Instability on Search Markets," UCLA Economics Working Papers 655, UCLA Department of Economics.
    3. Mariano Tommasi, 1993. "The Consequences of Price Instability on Search Markets," UCLA Economics Working Papers 700, UCLA Department of Economics.

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