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On repeated myopic use of the inverse elasticity pricing rule

Kenneth Fjell and Debashis Pal

Economics Letters, 2019, vol. 175, issue C, 12-14

Abstract: We examine the effects of repeated myopic use of the inverse elasticity pricing rule. By myopic, we mean ignoring that elasticity and marginal cost may vary with output and price. It is known that myopic use of the rule leads to price changes which are too large relative to the optimal price change (Fjell, 2003). While some microeconomics textbooks suggest that the rule may be used repeatedly to reach optimal price, they are vague about the conditions for when this works. We show that repeated myopic use leads to convergence if demand is sufficiently convex, and specify an exact condition.

Keywords: Microeconomics; Markup pricing; Elasticity (search for similar items in EconPapers)
JEL-codes: C61 D40 L11 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:ecolet:v:175:y:2019:i:c:p:12-14