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Consumers’ Imperfect Information and Price Rigidities

By  |  October 11, 2012

Posted by D. Daniel Sokol

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    Jean-Paul L’Huillier (EIEF) has written on Consumers’ Imperfect Information and Price Rigidities.

    ABSTRACT: This paper develops a model of price rigidities and information diffusion in decentralized markets with private information. First, I provide a strategic microfoundation for price rigidities, by showing that firms are better off delaying the adjustment of prices when they face a high number of uninformed consumers. Second, in an environment where consumers learn from firms’ prices, the diffusion of information follows a Bernoulli differential equation. Therefore, learning follows nonlinear dynamics. Third, the price rigidity produces an informational externality that affects welfare. Fourth, the dynamics of output are hump-shaped due to consumer learning.