Sticky Prices, Coordination and Enforcement

John Driscoll and Ito Harumi ()
Additional contact information
Ito Harumi: Brown University and NBER

The B.E. Journal of Macroeconomics, 2003, vol. 3, issue 1, 25

Abstract: Price-setting models with monopolistic competition and costs of changing prices exhibit coordination failure: in response to a monetary policy shock, individual agents lack incentives to change prices even when it would be Pareto-improving if all agents did so. The potential welfare gains are in part evaluated relative to a benchmark equilibrium of perfect, costless coordination; in practice, since agents will still have incentives to deviate from the benchmark equilibrium, coordination is likely to require enforcement. We consider an alternative benchmark equilibrium in which coordination is enforced by punishing deviators. This is formally equivalent to modeling agents as a cartel playing a punishment game. We show that this new benchmark implies that the welfare losses from coordination failure are smaller. Moreover, at the new benchmark equilibrium, prices are upwards-flexible but downwards-sticky. These last results suggest that the dynamic behavior of sticky-price models may more generally depend on the kind of imperfect competition assumed.

Keywords: coordination failure; menu costs; monopolistic competition; cartel (search for similar items in EconPapers)
Date: 2003
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.2202/1534-5998.1096 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
Working Paper: Sticky prices, coordination and enforcement (2003)
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: https://EconPapers.repec.org/RePEc:bpj:bejmac:v:topics.3:y:2003:i:1:n:10

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/bejm/html

DOI: 10.2202/1534-5998.1096

Access Statistics for this article

The B.E. Journal of Macroeconomics is currently edited by Arpad Abraham and Tiago Cavalcanti

More articles in The B.E. Journal of Macroeconomics from De Gruyter
Bibliographic data for series maintained by Peter Golla ().