Rationally Inattentive Seller: Sales and Discrete Pricing

This paper presents a model of a rationally inattentive seller responding to shocks to unit input cost. The model generates price series imultaneously exhibiting all three of the following features that can be found in the data. 1) Prices change frequently. 2) Responses of prices to aggregate variables are delayed. 3) Prices move back and forth between a few rigid values. Discrete pricing arises even if the unit input cost varies in a continuous range. Results of the model also agree with the evidence that reductions in price, e.g. sales, are usually short-lasting and that the highest price in a sample tends to be the most quoted price. Discrete and asymmetric pricing is a seller's optimal response to his limited information capacity. Moreover, the model provides rationale for faster responses to aggregate shocks in industries with more volatile idiosyncratic shocks as well as for a steeper Philip's curve in less stable aggregate conditions.

[1]  Yulei Luo.  Consumption Dynamics Under Information Processing Constraints , 2006 .

[2]  Martin Eichenbaum,et al.  Monetary Policy Shocks: What Have We Learned and to What End?" in The Handbook of Macroeconomics , 1999 .

[3]  Nicholas Barberis,et al.  Style Investing , 2000 .

[4]  Robert A. Wilson,et al.  Book Reviews: The MIT Encyclopedia of the Cognitive Sciences , 2000, CL.

[5]  S. Kiesler,et al.  Managerial Response to Changing Environments: Perspectives on Problem Sensing from Social Cognition. , 1982 .

[6]  C. Sims,et al.  Discrete Actions in Information-Constrained Tracking Problems , 2011 .

[7]  I. Hernando,et al.  EUROSYSTEM INFLATION PERSISTENCE NETWORK DO DECREASING HAZARD FUNCTIONS FOR PRICE CHANGES MAKE ANY SENSE? 1 , 2005 .

[8]  R. Vanderbei.  LOQO:an interior point code for quadratic programming , 1999 .

[9]  Ricardo Reis,et al.  Inattentive Producers , 2005 .

[10]  C. Sims.  Implications of rational inattention , 2003 .

[11]  G. Day,et al.  Managerial Representations of Competitive Advantage , 1994 .

[12]  Peter J. Klenow,et al.  Some Evidence on the Importance of Sticky Prices , 2004 .

[13]  B. E. Partridge,et al.  The Nature of Managerial Work , 1974 .

[14]  N. Mankiw,et al.  Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve , 2001 .

[15]  J. Ruiz Moreno.  [Organizational learning]. , 2001, Revista de enfermeria.

[16]  Victor Aguirregabiria.  THE DYNAMICS OF MARKUPS AND INVENTORIES IN RETAILING FIRMS , 1999 .

[17]  Jordi Mondria,et al.  Portfolio choice, attention allocation, and price comovement , 2010, J. Econ. Theory.

[18]  Emi Nakamura.  Pass-Through in Retail and Wholesale , 2008 .

[19]  P. Kehoe,et al.  Sales and the real effects of monetary policy , 2007 .

[20]  Mirko Wiederholt,et al.  Optimal Sticky Prices under Rational Inattention , 2009, Credit and Capital Markets – Kredit und Kapital: Volume 52, Issue 4.

[21]  L. Robert.  Some International Evidence on Output-Inflation Tradeoffs. , 1973 .

[22]  Emi Nakamura,et al.  Price setting in forward-looking customer markets , 2011 .

[23]  E. Rosch,et al.  Cognition and Categorization , 1980 .

[24]  Emi Nakamura,et al.  Five Facts about Prices: A Reevaluation of Menu Cost Models , 2008 .

[25]  Bernardo Guimaraes,et al.  Sales and Monetary Policy , 2008 .

[26]  D. MacKenzie,et al.  The use of knowledge about society , 2008 .

[27]  H. Varian.  A Model of Sales , 1980 .

[28]  C. Bishop.  The MIT Encyclopedia of the Cognitive Sciences , 1999 .

[29]  Francesco Lippi,et al.  Optimal Price Setting with Observation and Menu Costs , 2010 .

[30]  E. Lazear.  Retail Pricing and Clearance Sales , 1984 .

[31]  Henry Mintzberg.  The Nature of Managerial Work , 1974, Operational Research Quarterly (1970-1977).

[32]  H. Simon,et al.  Information Processing Models of Cognition , 1979 .

[33]  R. Lucas.  Expectations and the neutrality of money , 1972 .

[34]  Filip Mat,et al.  Rigid Pricing and Rationally Inattentive Consumer , 2010 .

[35]  D. V. Widder,et al.  Necessary and sufficient conditions for the representation of a function by a Weierstrass transform , 1951 .

[36]  C. E. SHANNON,et al.  A mathematical theory of communication , 1948, MOCO.

[37]  Bartosz Mackowiak,et al.  Business Cycle Dynamics Under Rational Inattention , 2011, SSRN Electronic Journal.

[38]  Filip Matejka,et al.  Rigid Pricing and Rationally Inattentive Consumer , 2010 .

[39]  Lawrence J. Christiano,et al.  Monetary Policy Shocks: What Have We Learned and to What End? , 1998 .

[40]  Laura L. Veldkamp,et al.  Information Acquisition and Under-Diversification , 2008 .

[41]  M. Eichenbaum,et al.  Reference Prices and Nominal Rigidities , 2008 .

[42]  Mikhail Golosov,et al.  Menu Costs and Phillips Curves , 2003, Journal of Political Economy.

[43]  Jean Boivin,et al.  Sticky Prices and Monetary Policy: Evidence from Disaggregated U.S. Data , 2007 .

[44]  Thomas M. Cover,et al.  Elements of Information Theory , 2005 .

[45]  P. Kehoe,et al.  Prices are Sticky after All , 2010 .

[46]  M. Woodford.  Information-Constrained State-Dependent Pricing , 2008 .

[47]  Thomas M. Cover,et al.  Elements of Information Theory: Cover/Elements of Information Theory, Second Edition , 2005 .

[48]  Luis Julián Álvarez González,et al.  Price setting behaviour in Spain: evidence from micro PPI data , 2005 .

[49]  F. Hayek.  The economic nature of the firm: The use of knowledge in society , 1945 .

[50]  Nir Jaimovich,et al.  Reference Prices, Costs, and Nominal Rigidities , 2011 .

[51]  C. O'Reilly.  Individuals and Information Overload in Organizations: Is More Necessarily Better? , 1980 .

[52]  C. Sims.  Rational Inattention: Beyond the Linear-Quadratic Case , 2006 .