Menu Costs, Sticky Prices, and Strategic Firm Interaction

Dan Bernhardt ()

Working Papers from Queen's University, Department of Economics

Abstract: Sticky nominal prices represent a cornerstone of many macroeconomic models. The effects of price adjustment on strategic firm interaction and the resulting price series implications are less established. This paper develops a spatial economy to analyze these interactions. In the two period environment, each firm, facing menu costs, must choose (whether to adjust) the price of its spatially identified good in the Bayesian Nash competition. These finding accord with empirical work which find that markets with more heterogeneous goods which are less competitive (e.g. labour) have stickier prices than others (e.g. wheat). Firms tend to adjust prices in concert and be more responsive towards shocks which lead to price increases than decreases, as has been documented empirically. The magnitude of menu costs affect the ability of firms to collude, so expected profits may increase with menu costs.

Keywords: spatial competition; heterogeneity (search for similar items in EconPapers)
Date: 1987

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:qed:wpaper:688

Access Statistics for this paper

More papers in Working Papers from Queen's University, Department of Economics
Contact information at EDIRC.
Series data maintained by Mark Babcock ().