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Price competition in an inflationary environment

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  • Duersch, Peter
  • Eife, Thomas A.

Abstract

In an experimental study with price-setting firms we find that inflation significantly reduces real prices (by lowering price markups) and significantly raises welfare compared to the treatment with a constant overall price level. Money illusion and a reduced ability to collude in an environment with a constantly changing, i.e., increasing, price level drive this result. In a third treatment with deflation, collusion is somewhat reduced as well, but money illusion pushes prices up so that welfare is lower than under inflation.

Suggested Citation

  • Duersch, Peter & Eife, Thomas A., 2019. "Price competition in an inflationary environment," Journal of Monetary Economics, Elsevier, vol. 104(C), pages 48-66.
    • Handle: RePEc:eee:moneco:v:104:y:2019:i:c:p:48-66
    DOI: 10.1016/j.jmoneco.2018.09.004
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    2. Camille Cornand & Frank Heinemann, 2014. "Experiments on Monetary Policy and Central Banking," Research in Experimental Economics, in: Experiments in Macroeconomics, volume 17, pages 167-227, Emerald Group Publishing Limited.
    3. Bulutay, Muhammed & Hales, David & Julius, Patrick & Tasch, Weiwei, 2021. "Imperfect tacit collusion and asymmetric price transmission," Journal of Economic Behavior & Organization, Elsevier, vol. 192(C), pages 584-599.

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    More about this item

    Keywords

    Inflation; Markups; Experiment; Money illusion; Cooperation;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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