Search with Learning and Price Adjustment Dynamics

This paper presents a theory of limited price responsiveness to cost shocks in a context of search with learning. Consumers confuse general cost shocks, common to all firms in the industry, with firm specific shocks. In the case of a general cost increase, this confusion leads to an excessive propensity to search, temporarily inhibiting price increases, lest they encourage search. In the case of an idiosyncratic shock, consumers initially search too little, allowing the prices of high cost firms to temporarily overshoot.


Issue Date:
1995-05
Publication Type:
Working or Discussion Paper
DOI and Other Identifiers:
Record Identifier:
https://ageconsearch.umn.edu/record/275604
Language:
English
Total Pages:
37
Series Statement:
Working Paper No. 18-95




 Record created 2018-08-01, last modified 2020-10-28

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