We establish five facts about prices in the U.S. economy: 1) The median implied duration of consumer prices when sales are excluded at the product level is between 8 and 11 months. The median implied duration of finished goods producer prices is 8.7 months. 2) One-third of regular price changes are price decreases. 3) The frequency of price increases responds strongly to inflation while the frequency of price decreases and the size of price increases and price decreases do not. 4) The frequency of price change is highly seasonal: It is highest in the 1st quarter and lowest in the 4th quarter. 5) The hazard function of price changes for individual consumer and producer goods is downward sloping for the first few months and then flat (except for a large spike at 12 months in consumer services and all producer prices). These facts are based on CPI microdata and a new comprehensive data set of microdata on producer prices that we construct from raw production files underlying the PPI. We show that the 1st, 2nd and 3rd facts are consistent with a benchmark menu-cost model, while the 4th and 5th facts are not.

Consumer privacy and the market for customer information in electronic retailing are investigated. The value of customer information derives from the ability of firms to identify individual consumers and charge them personalized prices. Two settings are studied, a closed privacy regime in which sale of customer information is forbidden and an open privacy regime in which it is permitted. Consumers fare poorly and firms fare well under an open privacy regime when consumers are myopic. In such settings the opportunity to sell information often gives firms incentives to charge ‘experimental ’ prices. When consumers are farsighted relative to firms, however, they may undermine the market for customer information by strategically rejecting offers. In this case, firms are always better off committing to keep customer information private.

We propose a new explanation for price rigidity. If consumers form habits in individual goods, then firms face a time-inconsistency problem. The consumers ’ habits imply that low prices in the future help attract customers in the present. Firms would therefore like to promise low prices in the future. But when the future arrives they have an incentive to exploit consumers ’ habits and price gouge. In this model, unlike the standard no-habit model, price rigidity is an equilibrium outcome. Equilibrium price rigidity can be sustained because rigid prices help firms overcome the time-inconsistency problem. If consumers have incomplete information about firms ’ desired prices, the firm-preferred equilibrium has the firm price at or below a “price cap”. Our model therefore provides an explanation for the simultaneous existence of a rigid regular price and frequent sales, a pattern that is difficult to reconcile with existing models of price rigidity. Our model also explains why firms fear adverse reactions to price changes, why sales prices are more flexible than regular prices, why firms make explicit promises not to change prices and why price are more rigid to repeat customers than to one-time customers.

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Firms in the retail industry have to face uncertainty in demand when pricing seasonal goods such as clothing and apparels. This optimization problem can be modeled as a risk-neutral monopoly facing a two-period stochastic demand, where period 1 indicates the regular season when a new product line is introduced and period 2 indicates an off-season when the price for the old product line is marked down for clearance. The firm determines period 1 price and total quantity supplied before either period, and determines period 2 price based on sales from period 1. The findings are: period 1 price always exceeds period 2 price; prices in both periods increase if pricing in period 1 lowers the uncertainty in period 2; and an inherent increase in uncertainty has ambiguous effect on period 1 price and tends to raise period 2 price. Empirical data confirms the first result, but cannot confirm or dispute the other two due to the inability to control for the differences in the expected demand function. Empirical data also suggests that the model is inadequate in predicting temporary markdowns. To accurately reflect the retail

This paper provides a new explanation of why price reductions take place on a regular basis. It is argued that the demand for a …rm’s product drops over time because of the erosion of consumers’ brandrecall,whichinturncanbeboostedbypricecuts. Afteranalyzingthedynamicoptimalchoice of price discounts in both monopoly and duopoly settings, I show that a monopolist’s optimal pricing strategy involves alternating between a constant high (normal) price and a constant low (discount) price with …xed frequency. In duopoly competition, the two …rms always o¤er discounts at the same time in any equilibrium.

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This paper studies a dynamic model of perfectly competitive price posting under demand uncertainty. Firms must produce output in advance. After observing aggregate sales in prior periods, firms post prices for their unsold output. Consumers arrive at the market in random order, observe the posted prices, and either purchase at the lowest available price or delay their purchase decision. Every sequential equilibrium outcome is Pareto optimal. Thus consumers endogenously sort themselves efficiently, with the highest valuations purchasing first. Transactions prices in each period rise continuously, as firms become more optimistic about demand, followed by a market correction. By the last period, prices are market clearing. 1