Abstract :
If consumersformhabitsinindividualgoods,firmsfaceatime-inconsistencyproblem.
Low pricesinthefuturehelpattractcustomersinthepresent.Firms,therefore,havean
incentivetopromiselowpricesinthefuture,butpricegougewhenthefuturearrives.
In thissetting,firmsbenefitfrom‘‘committingtoastickyprice.’’Ifconsumershave
incompleteinformationaboutcostsanddemand,thefirm-preferredequilibriumhas
thefirmpriceatorbelowa‘‘pricecap.’’Themodelthereforeprovidesanexplanationfor
thesimultaneousexistenceofarigidregularpriceandfrequent‘‘sales’’.
