Search, sticky prices and deflation

Abstract

This paper examines equilibrium in a deflationary environment, in a market with free entry where consumers search and firms set prices on individual units of the commodity. Prices attached to newly produced goods are continuously adjusted. Prices attached to previously produced goods can only be changed at a cost. Deflation cuts into the market power created by the need to search for the good. Thus consumers' welfare is inverse u-shaped in deflation