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Journal Article

The Consequences of Price Instability on Search Markets: Toward Understanding the Effects of Inflation

Mariano Tommasi
The American Economic Review
Vol. 84, No. 5 (Dec., 1994), pp. 1385-1396
Stable URL: http://www.jstor.org/stable/2117778
Page Count: 12
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The Consequences of Price Instability on Search Markets: Toward Understanding the Effects of Inflation
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Abstract

Real price variability depreciates the information about future prices contained in current ones. Repeat-purchase customers have, then, less incentive to acquire price information. The fact that consumers are less well informed allows firms to increase their markups and permits inefficient producers to increase their sales. Production gets reallocated toward higher-cost firms. Given the well-documented correlation between inflation and relative price variability, these results help explain some of the costs of inflation.

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