Wednesday, June 16, 2010
Posted by D. Daniel Sokol
Sheldon Kimmel (Economic Analysis Group, Antitrust Division, U.S. Department of Justice) explains Why Prices Rise Faster than they Fall.
ABSTRACT: For decades the fact that input price hikes are passed on faster than input price cuts was thought to be well explained by the assumption that competitive firms fully pass on all input price changes, so they can't price asymmetrically, so asymmetric pricing behavior is limited to oligopolies, firms that do all sorts of bizarre things (finding yet another one being no big deal). However, Peltzman found no effect of concentration on such asymmetric pricing, raising the puzzle of why competitive industries generally price asymmetrically. This paper solves that puzzle.