This paper aims at contributing to the research agenda on the sources of price stickiness, showing that the adoption of nominal price rigidity may be an optimal firms reaction to the consumers behavior, even if firms have no adjustment costs. With regular broadly accepted assumptions on economic agents behavior, we show that firms competition can lead to the adoption of sticky prices as an (sub game perfect) equilibrium strategy in order to attract more customers. The intuition behind the model formal conclusions are explained as follows.
We introduce the concept of a consumption centers model economy in which there are several complete markets that also compete with each other. Moreover, we weaken some traditional assumptions used in standard monetary policy models, by assuming that households have imperfect information about the inefficient time varying cost shocks faced by the firms, e.g. the ones regarding to inefficient equilibrium output levels under flexible prices. Moreover, the timing of events are assumed in such a way that, at every period, consumers have access to the actual prices prevailing in the market only after choosing a particular consumption center.
Indeed in a real world economy with several consumption centers as supermarkets or shopping malls, for instance, high frequent decisions on which one to choose are made before knowing the actual prices. Since such choices under uncertainty may decrease the expected utilities of risk averse consumers, competitive firms adopt some degree of price stickiness in order to minimize price uncertainty and "attract more customers". On the other hand, increasing such a degree reduces the unconditional expected discounted flow of firmspprofit, so there is a trade off between attracting more costumers and reducing profits.
In such a context, we proof two theorems stating that: (a) there is no equilibrium in which households always choose the same consumption center; and (b) the equilibrium degree of price stickiness is the highest, provided that firms have non negative unconditional expected discounted profit flows, e.g. the unconditional expected discounted profit flows will be zero in non trivial cases. Such a result follows from the two types of competition inputted in the model. The first one is the traditional monopolistic competition that allows each firm to choose an optimal price that maximizes its expected discounted profit flow. The second one is the Bertrand flavor competition played by the consumption centers using the degree of price stickiness in order to be more "attractive" for the households.
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The Role of Consumers Risk Aversion on Price Rigidity
