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On the Optimal Policy of Price Adjustments When Demanded and Cost are Uncertain

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  • Danziger, Leif

Abstract

This paper presents a model of a monopolistic firm's price adjustment. The firm's demand and cost are exposed to random shocks, and price adjustments are costly. It is shown that an increase in the riskiness of the shocks will have an ambiguous effect both on the expected size of the price adjustments and on the time interval between two consecutive price adjustments. It is also shown that an increase in the frequency of the shocks will have an ambiguous effect on the former and will decrease the latter, while an increase in the cost of price adjustments or in the interest rate will increase both the former and the latter.

Suggested Citation

  • Danziger, Leif, 1981. "On the Optimal Policy of Price Adjustments When Demanded and Cost are Uncertain," Foerder Institute for Economic Research Working Papers 275338, Tel-Aviv University > Foerder Institute for Economic Research.
    • Handle: RePEc:ags:isfiwp:275338
    DOI: 10.22004/ag.econ.275338
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    References listed on IDEAS

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    1. Katsuhito Iwai, 1974. "The Firm in Uncertain Markets and Its Price, Wage and Employment Adjustments," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(2), pages 257-276.
    2. Robert J. Barro, 1972. "A Theory of Monopolistic Price Adjustment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 39(1), pages 17-26.
    3. Eytan Sheshinski & Yoram Weiss, 1977. "Inflation and Costs of Price Adjustment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(2), pages 287-303.
    4. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
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