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Rational Expectations and Price Rigidity in a Monopolistically Competitive Market

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  • Kiyohiko G. Nishimura

Abstract

This paper analyses monopolistically competitive markets under incomplete information, facing unanticipated disturbances. Firms determine their prices before they have information about other firms' prices, and form their expectations about the average price rationally. If the market becomes very competitive in the sense that the price elasticity of individual demand is close to infinity, then the average price is completely insensitive to short-run unanticipated disturbances. In the intermediate case, if (a) cost disturbances are uniform and (b) demand and cost disturbances are correlated, then the average price is sensitive to cost and insensitive to demand.

Suggested Citation

  • Kiyohiko G. Nishimura, 1986. "Rational Expectations and Price Rigidity in a Monopolistically Competitive Market," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(2), pages 283-292.
  • Handle: RePEc:oup:restud:v:53:y:1986:i:2:p:283-292.
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    File URL: http://hdl.handle.net/10.2307/2297652
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    Citations

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    Cited by:

    1. Radoslaw Paluszynski & Pei Cheng Yu, 2023. "Commitment versus Flexibility and Sticky Prices: Evidence from Life Insurance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 99-122, July.
    2. Benassy, Jean-Pascal, 1993. "Nonclearing Markets: Microeconomic Concepts and Macroeconomic Applications," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 732-761, June.
    3. Gottfries, Nils, 1999. "Markets Shares, Financial Constraints, and Pricing Behavior in the Export Market," Working Paper Series 1999:15, Uppsala University, Department of Economics.
    4. Ryo Kato & Tatsushi Okuda, 2017. "Market Concentration and Sectoral Inflation under Imperfect Common Knowledge," IMES Discussion Paper Series 17-E-11, Institute for Monetary and Economic Studies, Bank of Japan.
    5. Nishimura, Kiyohiko G., 1998. "Expectation heterogeneity and price sensitivity," European Economic Review, Elsevier, vol. 42(3-5), pages 619-629, May.
    6. Kiyohiko G. Nishimura, 2007. "Increased Diversity and Deepened Uncertainty: Policy Challenges in a Zero‐Inflation Economy," International Finance, Wiley Blackwell, vol. 10(3), pages 281-300, December.
    7. Radoslaw Paluszynski & Pei Cheng, 2019. "Pay What Your Dad Paid: Commitment and Price Rigidity in the Market for Life Insurance," Discussion Papers 2019-02, School of Economics, The University of New South Wales.

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