Working Paper: NBER ID: w10915
Authors: Julio J. Rotemberg
Abstract: I suppose that consumers see a firm as fair if they cannot reject the hypothesis that the firm is somewhat benevolent towards them. Consumers that can reject this hypothesis become angry, which is costly to the firm. I show that firms that wish to avoid this anger will keep their prices rigid under some circumstances when prices would vary under more standard assumptions. The desire to appear benevolent can also lead firms to practice both third-degree and intertemporal price discrimination. Thus, the observation of temporary sales is consistent with my model of fair prices. The model can also explain why prices seem to be more responsive to changes in factor costs than to changes in demand that have the same effect on marginal cost, why increases in inflation seem to affect mostly the frequency of price adjustment without having sizeable effects on the size of price increases and why firms often announce their intent to increase prices in advance of actually doing so.
Keywords: No keywords provided
JEL Codes: E3; D4; D11; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm's desire to appear benevolent (L21) | price rigidity (D41) |
| consumer anger (D18) | price rigidity (D41) |
| firm's pricing strategies (L11) | consumer goodwill (L14) |
| cost changes (D24) | frequency of price adjustments (E30) |
| demand changes (O00) | size of price increases (P22) |