Pricing when Customers Care about Fairness but Misinfer Markups / Erik Eyster, Kristof Madarasz, Pascal Michaillat.

Format:

Book

Author/Creator:

Eyster, Erik.

Contributor:

National Bureau of Economic Research.

Madarasz, Kristof.

Michaillat, Pascal.

Series:

Working Paper Series (National Bureau of Economic Research) no. w23778.

NBER working paper series no. w23778

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2017.

Summary:

This paper proposes a theory of price rigidity consistent with survey evidence that firms stabilize prices out of fairness to their consumers. The theory relies on two psychological assumptions. First, customers care about the fairness of prices: fixing the price of a good, consumers enjoy it more at a low markup than at a high markup. Second, customers underinfer marginal costs from prices: when prices rise due to an increase in marginal costs, customers underappreciate the increase in marginal costs and partially misattribute higher prices to higher markups. Firms anticipate customers' reaction and trim their price increases. Hence, the passthrough of marginal costs into prices falls short of one--prices are somewhat rigid. Embedded in a simple macroeconomic model, our pricing theory produces nonneutral monetary policy, a short-run Phillips curve that involves both past and future inflation rates, a hump-shaped impulse response of output to monetary policy, and a nonvertical long-run Phillips curve.

Notes:

Print version record

September 2017.