The Optimality of Partial Price Adjustment Policies

Howard F Naish

Economic Inquiry, 1988, vol. 26, issue 4, 741-66

Abstract: This paper studies the optimal price adjustment policies of a monopolistically-competitive firm whose profit-maximizing price is subject to a serially-correlated, random disturbance. The firm chooses its price by comparing the expected costs of present and future price changes with the expected losses occurring when price deviates from its instantaneous profit-maximizing value. Partial price adjustment often is the best way to minimize the sum of these losses. Prices tend to be more flexible both in response to large shocks to the firm's profit-maximizing price and when much uncertainty exists about the future. Copyright 1988 by Oxford University Press.

Date: 1988
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