Costly Price Adjustment and Strategic Firm Interaction

Dan Bernhardt

International Economic Review, 1993, vol. 34, issue 3, 525-48

Abstract: This paper details the implications of costly price adjustment for strategic firm interaction and the time series of prices. Such frictions introduce multiple equilibrium strategies which, in turn, help facilitate collusion among firms. Collusive opportunities improve as product differentiation increases or markets become less competitive. Collusion may or may not increase profits depending on whether the equilibrium selection is the most profitable subgame perfect equilibrium, or the renegotiation proof equilibrium. Independent of the equilibrium selection, strategic incentives exist for firms to adjust prices in concert, and to be more responsive to shocks which lead to increased prices. Copyright 1993 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1993
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