INFLATION AND THE TIMING OF PRICE CHANGES (*)

Consider an oligopolistic industry in which the firms produce perfect substitutes and incur transaction costs of changing price. Under constant inflation, there is an equilibrium in which the firms change their nominal prices at equally spaced time‐points. Increasing the inflation rate increases the size of price changes, increases the frequency of price changes, and increases the average real price paid by buyers. The analysis derives its significance from its implications for the welfare costs of inflation: the inflation‐induced distortions in relative prices are larger the more sticky nominal prices are; and are larger the greater the tendency for firms to stagger (rather than synchronize) their price changes.