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The Bigger the Stickier: Asymmetric Adjustment to Negative Demand Shocks

Javier Tasso

No 4203, Working Papers from Asociación Argentina de Economía Política

Abstract: By extending a previous model, this article studies the response to unan- ticipated demand shocks in a simultaneous competition duopoly model, where adjustment is simultaneous as well and it is characterized by a sin- gle choice to adjust or not previous plans. In line with former analyses, responses are asymmetric in two dimensions: firms always react to positive demand shocks while they may not react to negative ones and, when de- mand shocks are negative and small in magnitude, only a single firm adjust its previous decisions. Since in the baseline model firms are identical, it is not determined which firm will adjust its decisions. By allowing for di↵erent marginal costs, there are medium sized negative shocks for which only the firm with higher marginal costs adjusts its price or quantities. This result suggest that the bigger firm is less willing to modify its plans after the shock and, as a consequence of this asymmetric response, it increases its market share.

JEL-codes: L1 D4 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2019-11
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