Macroeconomics of bargain hunting

Abstract

In most macroeconomic models prices for consumption goods are competitive and consumers are treated as price-takers, which gives rise to the law of one price. However, as the empirical literature documents, prices for the same products are substantially dispersed. The consumers facing the price heterogeneity can affect the effective prices they pay by employing different shopping strategies. In this thesis, I investigate whether price dispersion matters for shaping macroeconomic aggregates. In chapter 1, I study how income fluctuations are transmitted to consumption decisions in the presence of price dispersion. To this end, I propose a novel and tractable framework to study search for consumption as part of the optimal savings problem. The search protocol can be easily embedded into a standard incomplete-market model. As I show, frictions in the purchasing technology generate important macroeconomic implications for modeling inequality and, in general, household consumption. In economies with those frictions, consumers feature smoother consumption responses to income shocks and the level of wealth inequality is amplified. In chapter 2, I study equilibrium properties of a standard model of endogenous price distribution by Burdett and Judd (1983). In search economies of this type in most cases there are multiple equilibria. I show that only some allocations can be characterized as stable equilibria. Next, I propose a modification of the original model, which gives rise to one unique symmetric dispersed equilibrium, that can be used for characterizing every feasible allocation. Finally, in chapter 3, I use the framework from chapter 1 to study the redistributive function of monetary policy. I show that money injection to households might reduce the inefficiency generated by non-competitive behavior of firms thanks to an increase in consumption purchased by bargain hunters. This results in the reduction of the monopolistic power of firms and lower consumption real prices.