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A model of dynamic competition with sticky prices

Author

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  • Charalambos Christou

    (Department of Economics, University of Macedonia)

Abstract

This paper studies dynamic competition in a duopoly under the assumption that prices are sticky, that is, they do not adjust instantaneously to the level implied by the quantities produced by the two firms. Assuming that market de- mand is static, contrary to the traditional approach according to which demand evolves dynamically following the course of prices, the equilibrium prices are conjectured to be higher than the Cournot level since at that level the marginal direct benefit of a quantity increase is strictly lower than the marginal indirect cost of a future price reduction. Therefore, sticky prices have an effect similar to that of the fear of price wars that keeps prices high.

Suggested Citation

  • Charalambos Christou, 2015. "A model of dynamic competition with sticky prices," Discussion Paper Series 2015_05, Department of Economics, University of Macedonia, revised Nov 2015.
    • Handle: RePEc:mcd:mcddps:2015_05
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    File URL: http://aphrodite.uom.gr/econwp/pdf/dp052015.pdf
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    References listed on IDEAS

    as
    1. Tsutsui, Shunichi & Mino, Kazuo, 1990. "Nonlinear strategies in dynamic duopolistic competition with sticky prices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 136-161, October.
    2. Leufkens, Kasper & Peeters, Ronald, 2011. "Price dynamics and collusion under short-run price commitments," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 134-153, January.
    3. Agnieszka Wiszniewska-Matyszkiel & Marek Bodnar & Fryderyk Mirota, 2015. "Dynamic Oligopoly with Sticky Prices: Off-Steady-state Analysis," Dynamic Games and Applications, Springer, vol. 5(4), pages 568-598, December.
    4. Piga, Claudio A. G., 2000. "Competition in a duopoly with sticky price and advertising," International Journal of Industrial Organization, Elsevier, vol. 18(4), pages 595-614, May.
    5. Wirl, Franz, 2010. "Dynamic demand and noncompetitive intertemporal output adjustments," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 220-229, May.
    6. Fershtman, Chaim & Kamien, Morton I, 1987. "Dynamic Duopolistic Competition with Sticky Prices," Econometrica, Econometric Society, vol. 55(5), pages 1151-1164, September.
    7. Dockner, Engelbert, 1988. "On the relation between dynamic oligopolistic competition and long-run competitive equilibrimn," European Journal of Political Economy, Elsevier, vol. 4(1), pages 47-64.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    dynamic price competition; sticky prices.;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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