State-Dependent Pricing Under Infrequent Information: A Unified Framework

46 Pages Posted: 24 Jun 2010 Last revised: 16 May 2011

See all articles by Marco Bonomo

Marco Bonomo

Insper Institute of Education and Research

Carlos Carvalho

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics; Kapitalo Investimentos

René Garcia

Université de Montréal ; Toulouse School of Economics

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Date Written: September 30, 2010

Abstract

We characterize optimal state-dependent pricing rules under various forms of infrequent information. In all models, infrequent price changes arise from the existence of a lump-sum “menu cost.” We entertain various alternatives for the source and nature of infrequent information. In two benchmark cases with continuously available information, optimal pricing rules are purely state-dependent. In contrast, in all environments with infrequent information, optimal pricing rules are both time- and state-dependent, characterized by “trigger strategies” that depend on the time elapsed since the last date when information was fully factored into the pricing decision. After considering the case in which information arrives infrequently for exogenous reasons, we address pricing problems in which gathering and processing information also entails a lump-sum cost. When the information and adjustment costs must be incurred simultaneously, the optimal pricing policy is a fixed-price time-dependent rule. When the costs are dissociated, the optimal rule features price stickiness and inattentiveness. Finally, we consider versions of the price-setting problems in which firms continuously entertain partial information. We characterize the optimal pricing rules and provide numerical solution algorithms and examples in a unified framework.

Keywords: Menu Costs, Information Costs, Infrequent Information, Sticky Information, Inattentiveness, Optimal Price Setting

JEL Classification: E00, E31

Suggested Citation

Bonomo, Marco and Carvalho, Carlos and Garcia, René, State-Dependent Pricing Under Infrequent Information: A Unified Framework (September 30, 2010). FRB of New York Staff Report No. 455, Available at SSRN: https://ssrn.com/abstract=1629242 or http://dx.doi.org/10.2139/ssrn.1629242

Marco Bonomo

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil

Carlos Carvalho (Contact Author)

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22451
Brazil

HOME PAGE: http://https://sites.google.com/site/cvianac2/carloscarvalho

Kapitalo Investimentos ( email )

São Paulo
Brazil

René Garcia

Université de Montréal ( email )

C.P. 6128, succursale Centre-Ville
3150, rue Jean-Brillant, bureau C-6027
Montreal, Quebec H3C 3J7
Canada
514-7018807 (Phone)

HOME PAGE: http://https://myrenegarcia.wordpress.com

Toulouse School of Economics ( email )

Toulouse
France

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