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Price Determination in a Competitive Industry with Costly Information and a Production Lag

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  • Reuven Glick
  • Clas Wihlborg

Abstract

We analyze the role of information for price and output adjustment when competitive firms with rational expectations cannot directly distinguish between industrywide and firm-specific cost disturbances. Firms may become informed about industrywide cost conditions by acquiring information at a cost. The sensitivity of price and output to cost disturbances decreases as more firms choose to purchase information. The equilibrium industry share of informed firms increases as the cost of information falls and total cost variability increases. The equilibrium share of informed firms is largest when there is a comparable degree of variability in both industrywide and firm-specific costs.

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  • Reuven Glick & Clas Wihlborg, 1985. "Price Determination in a Competitive Industry with Costly Information and a Production Lag," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 127-140, Spring.
    • Handle: RePEc:rje:randje:v:16:y:1985:i:spring:p:127-140
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    Cited by:

    1. McNulty, Mark S. & Huffman, Wallace E., 1996. "Market equilibria with endogenous, hierarchical information," Journal of Economic Dynamics and Control, Elsevier, vol. 20(4), pages 607-626, April.

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