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

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. Copyright 1994 by American Economic Association.