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The Consequences of Price Instability on Search Markets: Toward Understanding the Effects of Inflation
The American Economic Review
Vol. 84, No. 5 (Dec., 1994), pp. 1385-1396
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/2117778
Page Count: 12
You can always find the topics here!Topics: Economic inflation, Prices, Real prices, Consumer prices, Market prices, Relative prices, Reservation prices, Unit costs, Demand curves, Economic costs
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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.
The American Economic Review © 1994 American Economic Association