Product Cycle and Prices: a Search Foundation
This paper develops a price model with a product cycle. Through a frictional product market with search and matching frictions, an endogenous product cycle is accompanied with a price cycle where a price for a new good and a price for an existing good are set in a different manner. This model nests a New Keynesian Phillips curve with the Calvo's price adjustment as a special case and generates several new phenomena. Our simple model captures observed facts in Japanese product level data such as the pro-cyclicality among product entry, demand, and price. In a general equilibrium model, an endogenous product entry increase variation of the inflation rate by 20 percent in Japan. This number increases to 72 percent with a price discounting after a first price.
"We have all visited several stores to check prices and/or to find the right item or the right size. Similarly, it can take time and effort for a worker to find a suitable job with suitable pay and for employers to receive and evaluate applications for job openings. Search theory explores the workings of markets once facts such as these are incorporated into the analysis. Adequate analysis of market frictions needs to consider how reactions to frictions change the overall economic environment: not only do frictions change incentives for buyers and sellers, but the responses to the changed incentives also alter the economic environment for all the participants in the market. Because of these feedback effects, seemingly small frictions can have large effects on outcomes."