Price Stickiness under Stochastic Demand

Wu Sheng-Yeh and Chen Guan-Ru

Bulletin of Applied Economics, 2020, vol. 7, issue 2, 109-117

Abstract: This study develops a two-period model in which the manufacturer determines a price floor and sets production output prior to resolution of uncertainty. The closer the distance between the minimum price and the high-demand-state price, the higher the degree of price rigidity. Solving for the minimum resale price and production output, the model indicates that asymmetric price transmission could be a characteristic of competitive markets. The retail price in a highly concentrated retail market might be lower than that in a retail market with fierce competition. The relationship between price adjustments and the market competition suggests that the reason underlying price rigidity should be considered while formulating the antitrust and monetary policies.

Keywords: Price Rigidity; Price Floor; Uncertainty (search for similar items in EconPapers)
JEL-codes: D12 L11 (search for similar items in EconPapers)
Date: 2020
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