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TOPIC:
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PRICING WHEN CUSTOMERS CARE ABOUT FAIRNESS BUT MISINFER MARKUPS
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ABSTRACT
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.
Click here to view the paper.
Click here to view the CV.
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PRESENTER
Pascal Michaillat
Brown University
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RESEARCH FIELDS
Macroeconomics
Public Economics
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DATE:
14 March 2018 (Wednesday)
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TIME:
4pm - 5.30pm
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VENUE:
Meeting Room 5.1, Level 5
School of Economics
Singapore Management University
90 Stamford Road
Singapore 178903
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