Essays on Price Adjustment and Imperfect Information

Abstract

Essays on Price Adjustment and Imperfect Information Luminita Stevens Understanding how firms set prices is a key step towards settling classic debates in economics regarding the sources of nominal price rigidities, the mechanisms through which disturbances are transmitted within and across countries, and the effectiveness of monetary policy in dampening business cycle fluctuations. This dissertation examines patterns of price adjustment at the firm level, both empirically and theoretically. The first chapter studies pricing patterns in US grocery store data. Using a novel empirical method, I identify changes in the distribution of product-level prices over time. These changes typically occur every seven months and mark the transition to new pricing regimes. Inside regimes, prices alternate among a small set of prices with high frequency. This evidence motivates a theory of price setting in which firms respond to shocks using multiple-price policies that are simple enough to only specify a small number of prices, and that are updated only on discrete occasions. The second chapter presents a theory of costly information that generates such simple, sticky policies. In order to economize on the costs of acquiring information, the firm designs a pricing policy that is a noisy, coarse representation of market conditions. Moreover, it updates this policy infrequently, based on imprecise signals about the state of the economy. Despite the high volatility of observed prices, the firm responds imperfectly to changes in market conditions. The third chapter, co-authored with Ryan Chahrour, addresses the patterns of adjustment in international relative prices. We develop a two-country model in which retailers have imperfect information and search for producers operating in different regions in the two countries. We demonstrate that frictions at the regional level within countries generate dispersion in international relative prices in the absence of additional frictions at the national border.