Firm-specific Price Research Articles

Price and output responsiveness to nominal changes under differential information

The paper considers how changes in nominal income are transmitted into price and output changes within a setting where the traditional assumption of instantaneous market clearing (costless coordination) is given up in favour of a more realistic setting where price decisions are made by numerous agents (firms) acting independently on their private (decentralized) information. The responsiveness of firm-specific prices is considered, and it is shown how absolute or nominal price rigidity can be explained. Building this into a theory of the general price level it is proved that heterogenously perceived nominal changes affect the price level less than proportionally. Moreover it is shown how a Phillips-curve relation between inflation and output can be rationalized within the model. Finally, the issue of relative price variability is considered and related to misallocation of economic resources under differential information.