Can prices be insensitive to unit cost variations? A game-theoretic alternative to the kinked demand curve explanation (original) (raw)

MONOPOLY POWER AND DOWNWARD PRICE RIGIDITY UNDER COSTLY PRICE ADJUSTMENT

Bulletin of Economic Research, 1988

ABSTRACT A firm optimally determines its price and output level before demand is observed, with an option to adju st the price at a cost after demand is observed. A recursive solution to the firm's maximization problem demonstrates that firms with a hi gh degree of monopoly power display relative downward price rigidity and overproduce compared to a standard monopolist, while the reverse applies to firms with low monopoly power. Comparative statics analysi s shows that increases in adjustment costs and decreases in demand va riability raise output for firms with high monopoly power; the opposi te applies again to firms with low monopoly power. Copyright 1988 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research

Price Rigidity and Flexibility: Recent Theoretical Developments - Introduction to the Special Issue

Managerial and Decision Economics, 2007

The price system, the adjustment of prices to changes in market conditions, is the primary mechanism by which markets function and by which the three most basic questions get answered: what to produce, how much to produce and for whom to produce. To the behaviour of price and price system, therefore, have fundamental implications for many key issues in microeconomics and industrial organization, as well as in macroeconomics and monetary economics. In microeconomics, managerial economics, and industrial organization, economists focus on the price system efficiency. In macroeconomics and monetary economics, economists focus on the extent to which nominal prices fail to adjust to changes in market conditions. Nominal price rigidities play a particularly important role in modern monetary economics and in the conduct of monetary policy because of their ability to explain short‐run monetary non‐neutrality. The behaviour of prices, and in particular the extent of their rigidity and flexibility, therefore, is of central importance in economics. This introductory essay briefly summarizes the eight studies of price rigidity that are included in this special issue.

Price Rigidity and Strategic Uncertainty

International Journal of Agent Technologies and Systems, 2011

The phenomenon of infrequent price changes has troubled economists for decades. Intuitively one feels that for most price-setters there exists a range of inaction, i.e., a substantial measure of the states of the world, within which they do not wish to modify prevailing prices. Economists wishing to maintain rationality of price-setters resorted to fixed price adjustment costs as an explanation for price rigidity. This paper proposes an alternative explanation, without recourse to any sort of physical adjustment cost, by putting strategic interaction into the center-stage of the analysis. Price-making is treated as a repeated oligopoly game. The traditional analysis of these games cannot pinpoint any equilibrium as a reasonable “solution” of the strategic situation. Thus, decision-makers have a genuine strategic uncertainty about the strategies of other decision-makers. Hesitation may lead to inaction. To model this situation, the authors follow the style of agent-based models, by m...