Price rigidity and flexibility: recent theoretical developments (original) (raw)

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 Flexibility: New Empirical Evidence - Introduction to the Special Issue

Managerial and Decision Economics, 2007

The marketplace, along with its price system, is the single most important institution in a western‐style free enterprise economy. The ability of prices to adjust to changes in supply and demand conditions enables the market to function efficiently, and that ability lies behind the magical invisible hand mechanism. The behaviour of prices and in particular the ability of prices to adjust to changes in market conditions, therefore, have fundamental implications for many key issues in many areas of both microeconomics as well as macroeconomics. It is, therefore, critical to study and understand whether there are barriers to price adjustments, what are the nature of these barriers, how the barriers lead to price rigidity, what are the possible implications of these rigidities, etc. This introductory essay briefly summarizes the 14 empirical studies of price rigidity that are included in this special issue.

Price Rigidity and Wage Rigidity: Market Failure or Market Efficiency

International journal of economics and finance, 2017

We observe that money wage and price level are not only rigid but also flexible in different business cycles. For example, there are inflationary recessions (e.g., oil crisis in U.S.) versus deflationary recessions (e.g., Great Depression between 1929 and 1933) as well as price rigidity (e.g., Great Depression between 1934 and 1939). Thus, the general price theory, including wage, should explain both price flexibility and price rigidity. When demand curve shifts during business cycle, the best strategy of the firm is to adjust capital and labor (i.e., size of the firm) so as to shift supply curve toward the same direction as demand curve shifts. If both supply curve and demand curve shift toward the same direction proportionally, there is perfect price rigidity. When product price is rigid, the firm is willing to pay previous wage. Thus, price rigidity and wage rigidity are effect (i.e., not only ex-post phenomenon that we observe but also endogenous market efficiency that arises fr...

Determinants of Price Rigidity and Flexibility: Some Survey Evidence for the Pakistan

International Review of Management and Business Research, 2020

The objective of the study is to estimate the determinants of price stickiness or flexibility. Data is collected through structured questionnaire from 342 firms, which are selected through stratified random sampling technique from the Industrial Estate of Khyber Pakhtunkhwa. To estimate the determinants of price flexibility/rigidity, models are estimated through ordinary least squares technique and binary logistic technique. The most important factors for price stickiness are implicit/explicit price contracts and minimum price volatility. Imperfect competitive market structure, number of regular customers, backward-looking behavior, and credibility of central bank and size of the firm are important determinants of price rigidity. While economic literacy and information set regarding expected inflation make the prices flexible. Study recommend that monetary policy of Pakistan should use other transmission channels of money supply instead of traditional channel, because it is found th...