A model of dynamic competition with sticky prices

Charalambos Christou ()
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Charalambos Christou: Department of Economics, University of Macedonia

Discussion Paper Series from 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.

Keywords: dynamic price competition; sticky prices. (search for similar items in EconPapers)
JEL-codes: L11 L12 L13 L22 L42 (search for similar items in EconPapers)
Date: 2015-11, Revised 2015-11
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