Sales and Monetary Policy

A striking fact about pricing is the prevalence of \sales": large temporary price cuts followedby prices returning exactly to their former levels. This paper builds a macroeconomic modelwith a rationale for sales based on firms facing customers with different price sensitivities.Even if firms can adjust sales without cost, monetary policy has large real effects owing tosales being strategic substitutes: a firm's incentive to have a sale is decreasing in the numberof other firms having sales. Thus the flexibility seen in individual prices due to sales does nottranslate into flexibility of the aggregate price level.[...]