We study a model where households make decisions according to a dual-process framework widely used in cognitive psychology.System 1 uses effortless heuristics but is susceptible to biases and errors.System 2 uses mental effort to make more accurate decisions.Through their pricing behavior, monopolistic producers can influence whether households deploy Systems 1 or 2. The strategic use of this influence creates a new source of price inertia and provides a natural explanation for the "rockets and feathers" phenomenon: prices rise quickly when costs increase but fall slowly when costs fall.Our model implies that price stability is not optimal.
No takes yet. Share an insight, caveat, or question.
Rebelo et al. (2024) studied this question.
Synapse has enriched 5 closely related papers on similar clinical questions. Consider them for comparative context: