In many retail markets, prices rise faster than they fall. We develop a model of search with learning to explain this phenomenon of asymmetric price adjustments. By extending our static game analysis to the dynamic setting, we demonstrate that asymmetric price adjustments arise naturally. When a positive cost shock occurs, all the searchers immediately learn the true state; the search intensity, and hence the prices fully adjust in the next period. When a negative cost shock occurs, it takes longer for non-searchers to learn the true state, and the search intensity increases gradually, leading to slow falling of prices. __________________________ * The Ohio State University; yang.1041@osu.edu. * * The Ohio State University; lixinye@econ.ohio-state.edu.We thank Matt Lewis, Howard Marvel, James Peck, and the seminar participants in the Third Summer Savannah) for valuable comments and suggestions. We also benefit from insightful comments and suggestions from two anonymous referees. All remaining errors are our own.
Loyalty discounts are nonlinear tariffs that condition rebates or marginal prices on meeting aggregate purchase or market share targets. These discounts are widespread, and are often the impetus for consumers to form buying groups, or group purchase organizations (GPOs). This paper models the competitive effects of the introduction of a GPO into a market within which the preferences of the GPO's members are horizontally differentiated. While nonlinear tariffs are an effective way for a monopolist to extract consumer surplus, when two suppliers compete using such schedules, the results are far more competitive in comparison to simple Bertrand-Nash competition with linear tariffs. This result holds when the product of each of the suppliers is attractive to a substantial portion of consumers. In our model, the nonlinear schedule puts all customers "in play" to a degree that contrasts sharply with the competition at the margin characteristic of constant per unit prices. Moreover, competing in nonlinear tariffs removes allocative inefficiency that can result from single price competition.
This paper studies optimal relational contracts in motivating workers in a market setting. We find that labor markets with higher turnover costs will use more subjective performance pay and less efficiency wages and that in those markets, the total wage payment is lower and the equilibrium employment level is higher. Surprisingly, under certain conditions, an increase in turnover costs leads to higher social welfare. Incorporating workers' search costs, we show that wages are procyclical in booms and are either rigid or countercyclical during recessions. The predictions of the model are consistent with some empirical evidence. (JEL D82, J33, J41, J63)
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