Monopoly Power and Downward Price Rigidity under Costly Price Adjustment

Ronald Balvers

Bulletin of Economic Research, 1988, vol. 40, issue 2, 115-31

Abstract: A firm optimally determines its price and output level before demand is observed, with an option to adju st the price at a cost after demand is observed. A recursive solution to the firm's maximization problem demonstrates that firms with a hi gh degree of monopoly power display relative downward price rigidity and overproduce compared to a standard monopolist, while the reverse applies to firms with low monopoly power. Comparative statics analysi s shows that increases in adjustment costs and decreases in demand va riability raise output for firms with high monopoly power; the opposi te applies again to firms with low monopoly power. Copyright 1988 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research

Date: 1988
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