2019/04/30 by Erik Eyster, Kristof Madarasz, Kristóf Madarász +1
Business, Management and Accounting · Economics, Econometrics and Finance · #Digital Platforms and Economics #Economic theories and models #Impulse (physics) #Inflation (cosmology) #Marginal cost #Monetary Policy and Economic Impact #Monetary policy #New Keynesian economics #Phillips curve #Price setting #econ.GN #econ.TH #q-fin.EC
paper · pdf · doi:10.1093/jeea/jvaa041
published as Journal of the European Economic Association 19 (2021) 1853-1898
openalex created_date 2019/04/25 · arxiv created 2020/08/01 · openalex publication_date 2020/08/29 · arxiv updated 2021/06/15 · openalex updated_date 2026/08/05
Abstract This paper proposes a theory of pricing premised upon the assumptions that customers dislike unfair prices—those marked up steeply over cost—and that firms take these concerns into account when setting prices. Because they do not observe firms’ costs, customers must extract costs from prices. The theory assumes that customers infer less than rationally: When a price rises due to a cost increase, customers partially misattribute the higher price to a higher markup—which they find unfair. Firms anticipate this response and trim their price increases, which drives the passthrough of costs into prices below one: Prices are somewhat rigid. Embedded in a New Keynesian model as a replacement for the usual pricing frictions, our theory produces monetary nonneutrality: When monetary policy loosens and inflation rises, customers misperceive markups as higher and feel unfairly treated; firms mitigate this perceived unfairness by reducing their markups; in general equilibrium, employment rises. The theory also features a hybrid short-run Phillips curve, realistic impulse responses of output and employment to monetary and technology shocks, and an upward-sloping long-run Phillips curve.