Search less for a better price

In many markets, sellers must spend resources to learn the costs of providing goods/services. This paper considers consumer searches in such markets. The findings show that: (i) even with ex ante identical consumers and sellers, there is price dispersion in the equilibrium, (ii) despite price dispersion and minimal search costs, it could be optimal to search just two sellers and (iii) the optimal number of searches can increase with sellers' information costs.     

Inflation, price dispersion, and market structure

In this paper, we use a novel data set containing prices from bazaars, convenience stores, and supermarkets in Istanbul to re-examine the relationship between price dispersion and inflation. Although existing evidence is mixed, we find positive and significant relationships between dispersion, on the one hand, and lagged dispersion and unexpected product-specific inflation on the other. We also find evidence that dispersion is initially decreasing in anticipated aggregate inflation but is eventually increasing. Finally, average price duration and dispersion are lowest in the bazaar. This is intuitive, since menu and search costs should be minimal in that market structure.     

The effects of information costs on search and convergence in experimental markets

Nearly all markets contain some kind of friction, making it difficult to reach full efficiency. One ubiquitous source of market friction is the cost of obtaining pricing information. We determine how market performance as well as buyer and seller behavior are affected by the introduction of price information costs in experimental posted markets.Rothschild [Journal of Political Economy (1973) 1283; Journal of Political Economy (1974) 689] theorizes that search is negatively related to knowledge of the price dispersion and the cost of search, and positively related to market price dispersion. We find that market knowledge and the cost of search itself affect search, but we find no evidence supporting the role of price dispersion in search decisions.We also find evidence supporting Smith and Plott [Review of Economic Studies (1979) 133] and Walker and Williams (1988), both of which show price convergence comes from below in posted-bid markets and from above in posted-offer markets. High information costs tend to reduce or eliminate convergence. Average prices are above the market-clearing price for posted-offer markets, and below for posted-bid markets, and never cross the market-clearing threshold, also consistent with Walker and Williams.More generally, our results support the notion of symmetry between experimental posted-offer and posted-bid markets, broadening the relevance of experimental search research.     

声誉、搜寻成本与网上交易市场均衡

本文在搜寻理论的框架内分析了在卖家声誉存在差异的情况下,网上拍卖市场搜寻成本对价格水平和价格离差的影响,进而考察了搜寻成本对网上市场声誉机制的影响。本文的结论是:尽管搜索工具提高了网上交易市场的效率,但网上交易市场仍存在不可忽视的搜寻成本;较高的搜寻成本导致不同声誉水平的卖家同时存在于网上交易市场,高声誉卖家制定的价格较高,低声誉卖家制定的价格较低;搜寻效率的提高可以降低均衡价格水平,网站提供的推广服务也可以降低搜寻成本,降低均衡价格水平。模型很好地解释了网上拍卖市场中的一些现象,也与最近文献的经验事实有较好的吻合。     

PRICE DISPERSION,INFLATION, AND WELFARE*

We examine the implications of inflation for both price dispersion and welfare in a monetary search economy. In our economy, if the degree of buyers' incomplete information about prices is fixed, both price dispersion and real prices are increasing in inflation. As the inflation rate approaches the Friedman rule, both price dispersion and welfare losses vanish. If households choose the number of prices to observe, then the optimal inflation rate may exceed the Friedman rule as inflation induces search and, up to a point, raises welfare by eroding market power.     

Relative price and inflation variability in a simple consumer search model

There is a large empirical literature on the effect of aggregate inflation on both price-level dispersion (relative price variability, RPV) and inflation rate dispersion (relative inflation variability, RIV) across goods or locations. Early empirical work of RIV has an explicit theoretical foundation in signal-extraction models. However, recent empirical work on RPV has produced results inconsistent with signal-extraction models. In particular, while RIV is increasing in the absolute value of inflation shocks, RPV is a negative monotonic function of inflation shocks. We show that consumer search theory offers a potential explanation for these apparently contradictory observations.     

STICKY PRICES AND COSTLY CREDIT

We develop a theory of money and credit as competing payment instruments, then put it to work in applications. Agents use cash and credit because the former (latter) is subject to the inflation tax (transaction costs). Frictions that make the choice of payment method interesting also imply equilibrium price dispersion. We derive closed-form solutions for money demand, and show how to simultaneously account for the price-change facts, cash–credit shares in micro data, and money-interest correlations in macro data. The effects of inflation on welfare, price dispersion and markups are discussed, as are nonstationary equilibria with dynamics in the price distribution.     

Inflation,oil price volatility and monetary policy

In a fully micro-founded New Keynesian framework, we characterize an analytical relationship between average inflation and oil price volatility by solving the rational expectations equilibrium of the model up to second order of accuracy. The model shows that higher oil price volatility induces higher levels of average inflation. We also show that when oil has low substitutability in the production function, the higher the weight the central bank assigns to inflation in the policy rule, the lower the level of average inflation is. The analytical solution further indicates that, for a given level of oil price volatility, average inflation is higher when marginal costs are convex in oil prices, the Phillips Curve is convex, and the degree of relative price dispersion is higher. The evolution of inflation during the 70s and 80s is consistent with the prediction of the model.     

The Costs of Inflation Revisited

Neoclassical treatments of inflation understate the costs associated with inflation, even at very low levels. A comparative institutions perspective that recognizes the epistemological properties of prices and the institutional process by which inflation takes place, reveals the costs of inflation to be both larger and more widespread than standard treatments suggest. This paper makes use of insights from Austrian economics, public choice theory, and the new institutional economics to argue that inflation imposes costs by undermining the coordinative properties of the price system. Not only are there the direct costs of increased economic error, but actors also divert resources away from direct want-satisfaction into attempts to either prevent or cope with the increased degree of uncertainty inflation imposes. These resource costs are best understood from a comparative institutions perspective, as traditional measures of economic well-being, such as GDP, cannot distinguish between exchanges that directly satisfy wants, and exchanges that are attempts to correct or prevent utility-diminishing activities. The analogy between these coping costs and rent-seeking behavior is explored. In addition, inflation imposes costs by undermining the coordinative properties of markets and inducing actors to, on the margin, prefer to seek wealth or allocate resources through the political process.     

A Panel Smooth Transition Approach to Inflation and Relative Price Variability in China

This paper examines the relationship between inflation and relative price variability (RPV) by using provincial level data from China. The data contains three different inflation regimes and evidence of smooth transition is statistically prominent and the province‐specific time‐varying marginal impact of inflation on RPV varies substantially across inflation regimes. The inflation–RPV linkage is stronger when inflation is moderately high, but tends to fade out and might eventually disappear when inflation is steadily low. The policy implication of this result is that inflation targets should be set within a range in which the inflation–RPV link is the weakest (i.e. low‐inflation regime) to minimize undesirable price dispersion induced by inflation.     

The transmission mechanism of monetary policy: Microeconomic aspects of macroeconomic issues

The article analyzes the transmission mechanism of monetary policy in light of microeconomic theory. We address the influence of microeconomic factors on the transmission of monetary policy while taking into account the contributions of conventional price formation and competition theory and heterodox microeconomic theories, including work inspired by the post Keynesians. We found a multiplicity of results regarding changes in price levels and inflation derived from shifts in demand and costs. These results challenge the conventional view, which postulates a single behavior in the circuit from changes in interest rates to demand, prices, and inflation. We conclude that microeconomic and macroeconomic aspects should be integrated to properly explain monetary policy and analyze its effects and transmission mechanism.     

Nominal rigidities and retail price dispersion in Canada over the twentieth century

Abstract We introduce a new data set on over 230,000 monthly prices for 10 goods in 50 Canadian cities over the 40‐year period from 1910 to 1950. This information, coupled with previously published price information from the late twentieth century, allows us to present one of the first comprehensive views of nominal rigidities and retail price dispersion over the past 100 years. We find that nominal rigidities have been conditioned upon prevailing rates of inflation with a greater frequency of price changes occurring in the 1920s and the 1970s. Additionally, the process of retail market integration has followed a U‐shaped trajectory with many domestic markets being better integrated – as measured by the average dispersion of retail prices – at mid‐century than in the 1990s. We also consider the linkages between nominal rigidities and price dispersion, finding results consistent with present‐day data.     

Inflation,tax rules,and the prices of land and gold

Traditional theory implies that the relative price of consumer goods and of such real assets as land and gold should not be permanently affected by the rate of inflation. A change in the general rate of inflation should, in equilibrium, cause an equal change in the rate of inflation for each asset price. The experience of the past decade has been very different from the predictions of this theory: the prices of land, gold, and other such stores of value have increased by substantially more than the general price level. The present paper presents a simple theoretical model that explains the positive relation between the rate of inflation and the relative price of such real assets. More specifically, in an economy with an income tax, an increase in the expected rate of inflation causes an immediate increase in the relative price of such ‘store of value’ real assets. The behavior of real asset prices discussed in this paper is thus a further example of the non-neutral response of capital markets to inflation in an economy with income taxes.     

Costly Search, Capacity Constraints, and Bertrand Equilibrium Price Dispersion

This article analyzes the impact of transaction (search) costs and capacity constraints in an almost competitive market with homogeneous firms that compete on price. We characterize conditions under which Nash equilibria with price dispersion exist; in equilibrium, firms play pure strategies in prices and consumers adopt a symmetric mixed search strategy. Price dispersion is possible even though consumers all have the same search cost and valuation for the item and prices charged by all firms are common knowledge.     

An Endogenous Growth Model of a Financially Repressed Small Open Economy

The paper develops a monetary endogenous growth model of a financially repressed small open economy, characterized by curb markets, capital mobility, transaction costs in domestic and foreign capital markets, and a flexible exchange rate system, to analyze the impact of financial liberalization – interest rate deregulation and lower multiple reserve requirements – on growth and inflation. When the model is calibrated to match world figures, we find that interest rate deregulation enhances growth and reduces inflation in steady-state. For relatively smaller transaction costs in the curb market, the above result is, however, reversed. Under such circumstances, lowering the transaction costs in the foreign capital market tends to restore the growth-enhancing (inflation-reducing) capabilities of interest rate deregulation. Lower reserve requirements, though, always ensures lower (higher) steady-state inflation (growth).     

INFLATION AND THE DISPERSION OF REAL WAGES*

The article studies the effects of inflation on real wage dispersion in a search‐monetary framework. The economy is characterized by frictions in both the goods and the labor markets. In the goods market, buyers and sellers bargain over prices, whereas in the labor market firms post wage offers. In equilibrium, a lower inflation rate increases the dispersion of real wages. This result is consistent with both the observed trends in wage dispersion and the inflation rate witnessed in the 1980s and the 1990s in the United States and the empirical literature linking reduced inflation to greater wage dispersion.     

A model of relative national price levels under pricing to market

This paper proposes an alternative to the Balassa-Samuelson theory of how relative price levels between countries are determined. The theory is a general equilibrium formulation of a model where pricing to market arises endogenously from firm decisions. It differs from Balassa-Samuelson in that it centers on the distinction between segmented national goods markets rather than the distinction between traded and nontraded goods. The paper also explores how Balassa-Samuelson might be updated by combining it together with pricing to market elements. Applied to the case of a monetary union, the theory offers an alternative explanation for the inflation differentials observed in EMU. It implies that such differentials may be a natural and enduring feature of a monetary union in which markets for goods and labor are less than fully integrated.     

Search costs and the severity of adverse selection

In view of some recent empirical evidence, I suggest a relationship between the magnitude of search costs and the severity of adverse selection in the context of a dynamic model with asymmetric information. In markets with small search costs sellers with low quality products misrepresent their quality and demand a high price. If search costs are not negligible, sellers׳ price offers are truthful and all product qualities are traded over time. In markets with small search costs, a budget balanced mechanism can mitigate adverse selection: sellers should pay a per period market participation tax and receive a rebate after trading.     

Evidence on the effects of inflation on price dispersion under indexation

Distortionary effects of inflation on relative prices are the main argument for inflation stabilization in macro models with sticky prices. Under indexation of non-optimized prices, those models imply a nonlinear and dynamic impact of inflation on the cross-sectional price dispersion (relative price or inflation variability, RPV). Using US sectoral price data, we estimate such a relationship between inflation and RPV, also taking into account the endogeneity of inflation by using two- and three-stage least-squares and GMM techniques, which turns out to be relevant. We find an effect of (expected) inflation on RPV, and our results indicate that average (??trend??) inflation is important for the RPV?Cinflation relationship. Lagged inflation matters for indexation in the CPI data, but is not important empirically in the PPI data.