Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Jan, 1989, Volume 57, Issue 1

Optimal Price Dynamics and Speculation with a Storable Good<41:OPDASW>2.0.CO;2-Y
p. 41-80

Roland Benabou

This paper analyzes as a dynamic game the optimal price and storage strategies of, respectively: (a) the seller of a storable good, who must keep pace with inflation but incurs a cost to changing his price; (b) his customers, who speculate on the timing of price adjustments to buy and store just before. A unique (Markov) perfect equilibrium is shown to exist, and is fully characterized. It generally involves a phase of mixed strategies, during which the seller tries to deter speculation by injecting uncertainty into its price dynamics, while speculators store in increasing numbers, with possibly a final "run" on the good. The stochastic price policies of a large number of such firms are shown to aggregate back to a price index growing at the rate of general inflation in response to which they arose. The model thus establishes that: (a) a constant rate of aggregate inflation can at the same time generate and cover up significant uncertainty and social costs at the microeconomic level; (b) speculation can be destabilizing and socially wastful, even in the absence of shocks and imperfect information. Most importantly, they provide a theoretical foundation for the frequently encountered claim that inflation causes price uncertainty.

Log In To View Full Content

Journal News