Monopolistic competition with pro- and countercyclical pricing

Helmut Zink

No 255, Discussion Papers, Series I from University of Konstanz, Department of Economics

Abstract: We develop a market model which explains how prices react to short-run demand variations when the number of active price-setting firms is held fixed on its long-run level. We assume that for each firm the average production cost function is U-shaped, that customers are imperfectly informed about the quality of offers, and that customers may search for better offers. For low degrees of market transparency the long-run market outcome exhibits price dispersion with an endogenous finite number of firms. In this case, in the short-run, price mark-ups respond countercyclically to demand variations and productivity is procyclical. In the complementary case of higher degrees of market transparency, in the long-run we have a single-price equilibrium. In that case, in the short-run price mark-ups fall with decreasing demand while productivity diminishes with any deviation of demand from its long-run level.

Keywords: increasing returns; monopolistic competition; business cycle theory (search for similar items in EconPapers)
JEL-codes: D40 D83 L11 (search for similar items in EconPapers)
Date: 1991
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