TY - JOUR
T1 - Search with learning from prices does increased inflationary uncertainty lead to higher markups
AU - Benabou, Roland
AU - Gertner, Robert
N1 - Funding Information:
Acknowledgements. We would like to thank Olivier Blanchard, Dennis Carlton, Peter Diamond, Robert Lucas, Kevin Murphy, David Scharfstein, Jean Tirole, Robert Vishny, and the editors for helpful comments. Benabou gratefully acknowledges financial support from the National Science Foundation (grant SES-9008775). This is a revised version of a paper previously titled, "The Informativeness of Prices: Search with Learning and Cost Uncertainty." REFERENCES BARRO, R. (1976), "Rational Expectations and the Role of Monetary Policy", Journal ofMonetary Economics, 2, 1-32. BENABOU, R. (1988), "Search, Price Setting and Inflation", Review ofEconomic Studies, 55, 353-376. BENABOU, R. (1992), "Inflation and Efficiency in Search Markets, Review ofEconomic Studies, 59, 299-329. BORENSTEIN, S., CAMERON, C. and GILBERT, R. (1992), "Asymmetric Gasoline Price Responses to Crude Oil Price Changes" (mimeo, University of California, Davis). CUKIERMAN, A. (1979), "The Relationship Between Relative Prices and the General Price Level: A Suggested Interpretation", American Economic Review, 69,444-447. CUKIERMAN, A. (1983), "Relative Price Variability and Inflation: A Survey and Further Results", Carnegie-Rochester Series on Public Policy, Autumn. DANA, J. (1990), "A Search-Theoretic Model of Price Stickiness" (mimeo, Dartmouth College). DEGROOT, M. (1970) Optimal Statistical Decisions (New York: McGraw Hill). FISCHER, S. (1981), "Relative Shocks, Relative Price Variability, and Inflation", Brookings Papers on Economic Activity, 2, 381-441. FISHMAN, A. (1990), "Search, Diamond Paradox" (rnimeo, Tel Aviv University). . FUDENBERG, D. and TIROLE, J. (1991), "Perfect Bayesian Equilibrium and Sequential Equilibrium", Journal of Economic Theory, 53, 236-260. HERCOWITZ, Z. (1981), "Money and the Dispersion of Relative Prices", Journal of Political Economy, 89, 328-356. LUCAS, R. (1973), "Some International Evidence on Output-Inflation Tradeoffs", American Economic Review, 63, 326-334. MILGROM, P. (1981), "Good News and Bad News: Representation Theorems and Applications", Bell Journal ofEconomics, 12,380-391. MILGROM, P. and WEBER, R. (1982), "A Theory of Auctions and Competitive Bidding", Econometrica, SO, 1089-1112. PAGAN, A., HALL, A. and TRIVEDI, P. (1983), "Assessing the Variability of Inflation", Review ofEconomic Studies, SO, 585-596. PARKS, R. (1978), "Inflation and Relative Price Variability", Journal ofPolitical Economy, 86,79-85. REIGANUM, J. (1979), "A Simple Model of Equilibrium Price Dispersion", Journal ofPolitical Economy, 87, 851-858. ROSENFIELD, D. and SHAPIRO, R. (1981), "Optimal Adaptive Search", Journal ofEconomic Theory, 25,1-20. ROTHSCHILD, M. (1973), "Searching for the Lowest Price When the Distribution of Prices is Unknown", Journal ofPolitical Economy, 81, 689-711. TAYLOR, J. (1981), "On the Relation Between the Variability of Inflation and the Average Inflation Rate", in K. Brunner and A. Metzler (eds.), Carnegie-Rochester Conference Series on Public Policy: TheCosts and Consequences of Inflation, 15, 57-85. VINING, D. and ELWERTOWSKI, T. (1976), "The Relationship between Relative Prices and the General Price Level", American Economic Review, 66, 699-708.
PY - 1993/1
Y1 - 1993/1
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=84960560896&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84960560896&partnerID=8YFLogxK
U2 - 10.2307/2297813
DO - 10.2307/2297813
M3 - Article
AN - SCOPUS:84960560896
SN - 0034-6527
VL - 60
SP - 69
EP - 94
JO - Review of Economic Studies
JF - Review of Economic Studies
IS - 1
ER -