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Monopoly Power and Downward Price Rigidity under Costly Price Adjustment

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  • Balvers, Ronald J

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

Suggested Citation

  • Balvers, Ronald J, 1988. "Monopoly Power and Downward Price Rigidity under Costly Price Adjustment," Bulletin of Economic Research, Wiley Blackwell, vol. 40(2), pages 115-131, April.
    • Handle: RePEc:bla:buecrs:v:40:y:1988:i:2:p:115-31
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    Cited by:

    1. Munehisa Kasuya, 1999. "Downward Price Rigidity of the Japanese CPI -- Analysis by Probability Density Functions and Spatial Density Functions," Bank of Japan Working Paper Series Research and Statistics D, Bank of Japan.

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