Bargaining, fairness, and price rigidity in a dsge environment
By: David M. Arseneau and Sanjay K. Chugh
Contributors: Chugh, Sanjay K.; Board of Governors of the Federal Reserve System (U.S.)
Series: International finance discussion papers -- no. 900; International finance discussion papers (Online) -- no. 900.
Publisher: Federal Reserve Board
Published: 2007
Place of publication: Washington, D.C
Language: eng
Format: [electronic resource] /
Description: "A growing body of evidence suggests that an important reason why firms do not change prices nearly as much as standard theory predicts is out of concern for disrupting ongoing customer relationships because price changes may be viewed as "unfair".  Existing models that try to capture this concern regarding price-setting are all based on goods markets that are fundamentally Walrasian.  In Walrasian goods markets, transactions are spot, making the idea of ongoing customer relationships somewhat difficult to understand.  We develop a simple dynamic general equilibrium model of a search-based goods market to make precise the notion of a customer as a repeat buyer at a particular location.  In this environment, the transactions price plays a distributive role as well as an allocative role.  We exploit this distributive role of prices to explore how concerns for fairness influence price dynamics.  Using pricing schemes with bargaining-theoretic foundations, we show that the particular way in which a "fair" outcome is determined matters for price dynamics.  The most stark result we find is that complete price stability can arise endogenously.  There are issues about which models based on standard Walrasian goods markets are silent"--Federal Reserve Board web site.
Notes: Title from PDF file as viewed on 9/10/2007.

Includes bibliographical references.

Also available in print.

System requirements: Adobe Acrobat Reader.

Mode of access: World Wide Web.