The Optimality of a Control Band Policy

Jose M. Plehn-Dujowich
Additional contact information
Jose M. Plehn-Dujowich: University of Buffalo

Review of Economic Dynamics, 2005, vol. 8, issue 4, 877-901

Abstract: Consider a firm with an arbitrary profit function whose relative price follows a Brownian motion with negative drift. When the firm faces a fixed cost of price adjustment, we prove the optimal pricing policy is a control band if the following sufficient conditions are met: the profit function is continuous, strictly concave and single-peaked; moreover, together with its first and second derivatives, it is bounded in absolute value by a polynomial. We also demonstrate various ways of constructing the value function associated with the control band policy and show it has certain properties carried over from the profit function. Numerical examples are found to be consistent with empirical estimates regarding the frequency of price adjustments. (Copyright: Elsevier)

Keywords: stochastic control; menu cost (search for similar items in EconPapers)
JEL-codes: C61 E31 (search for similar items in EconPapers)
Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://dx.doi.org/10.1016/j.red.2005.05.001 Full text (application/pdf)
Access to full texts is restricted to ScienceDirect subscribers and ScienceDirect institutional members. See http://www.sciencedirect.com/ for details.

Related works:
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:red:issued:v:8:y:2005:i:4:p:877-901

Ordering information: This journal article can be ordered from
https://www.economic ... ription-information/

DOI: 10.1016/j.red.2005.05.001

Access Statistics for this article

Review of Economic Dynamics is currently edited by Loukas Karabarbounis

More articles in Review of Economic Dynamics from Elsevier for the Society for Economic Dynamics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().