Working Paper

Price setting, price dispersion, and the value of money - or - The law of two prices


Abstract: We study models that combine search, monetary exchange, price posting by sellers, and buyers with preferences that differ across random meetings - say, because sellers in different meetings produce different varieties of the same good. We show how these features interact to influence the price level (i.e., the value of money) and price dispersion. First, price-posting equilibria exist with valued fiat currency, which is not true in the standard model. Second, although both are possible, price dispersion is more common than a single price. Third, perhaps surprisingly, we prove generically there cannot be more than two prices in equilibrium.

Keywords: Price levels; Money;

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Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers (Old Series)

Publication Date: 2002

Number: 0209