INTERTEMPORAL PRICING IN MARKETS WITH DIFFERENTIAL INFORMATION

This paper provides a theory of intertemporal pricing in a small marke t with differential information about the realizations of a stochastic process which determines demand. We study the sequential equilibria i n stationary strategies of the stochastic game between a seller and bu yer. The seller has zero cost of producing one unit of a non-durable g ood in all market periods. The buyer's value for the good is a random variable governed by a simple Markov process. At the beginning of each period the unit's value is determined by nature and is privately reve aled to the buyer. The seller posts a single price offer each period, which the buyer either accepts or rejects. Only two types of price pat hs emerge in equilibrium: either prices are constant, or they have per sistent cycles between a low and a high value. In both cases, however, prices are ''sticky'' in the sense that changes in price are less fre quent than changes in the economy's fundamentals.