The Welfare Effects of Supply and Demand Frictions in a Dynamic Pricing Game

Mateusz Myśliwski, Fabio Miessi Sanches, Daniel Silva Junior and Sorawoot Srisuma

The Economic Journal, 2025, vol. 135, issue 670, 1782-1813

Abstract: We propose a dynamic oligopoly pricing model, in which consumers’ choices exhibit inertia and firms face costly price adjustments. The primitives of the model are estimated using scanner data from the UK butter and margarine industry. We evaluate the effects of frictions on price dynamics, profits and consumer welfare. We find that price adjustment costs are substantial and represent between 24%-34% of net margins. Our model predicts that the absence of these costs reduces persistence in prices, increases firms’ profits, but has little effect on consumer surplus. The effects of consumer inertia on prices are much more pronounced than when firms cannot adjust prices freely.

Date: 2025
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