The Informativeness of Prices: Search with Learning and Cost Uncertainty, Issue 3833
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.
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Aggregate cost uncertainty assumption A.1 beliefs charge p„(c charge their monopoly comparative statics conditional distribution conditional expectation consumer observes consumer surplus consumers search correlation effect cost realizations decreases differential equation distribution of costs effects of inflation equilibrium path equilibrium pricing exists expected profits firm charges firm l's firm with cost firm's price higher price implies induce search inferences inflation uncertainty inflation variability informational costs INFORMATIVENESS OF PRICES intuitive iso-elastic joint cost shocks LEARNING AND COST Lemma low search costs lower price macroeconomic market power mixed strategies monopolist monopoly price monopoly profits NBER oil shock optimal price paper pf(c pricing rule pricing strategy profits per consumer pure strategy quasi-concave relative price reservation price equilibrium reservation price property Robert Gertner search costs lead search market search rules SEARCH WITH LEARNING simulations type of equilibrium uniform continuity value of search variance effect variance of joint zero