Inflation and welfare in retail markets: Prior production and imperfectly directed search

This paper considers the effect of monetary policy and inflation on retail markets: goods are dated and produced prior to being retailed; buyers direct their search on price and general quality; buyers' match-specific tastes are private information. Sellers set the same price for all buyers, some of whom do not value the good highly enough to buy it. The market economy is typically inefficient as a social planner would have the good consumed. Under free entry of sellers, the Friedman rule is optimal policy. When the upper bound on the number of participating sellers binds, moderate levels of inflation can be welfare improving.