Friday, January 29, 2016

A model of dynamic competition with sticky prices

Charalambos Christou (Department of Economics, University of Macedonia) offers A model of dynamic competition with sticky prices.

ABSTRACT:  This paper studies dynamic competition in a duopoly under the assumption that prices are sticky, that is, they do not adjust instantaneously to the level implied by the quantities produced by the two ?rms. Assuming that market de- mand is static, contrary to the traditional approach according to which demand evolves dynamically following the course of prices, the equilibrium prices are conjectured to be higher than the Cournot level since at that level the marginal direct bene?t of a quantity increase is strictly lower than the marginal indirect cost of a future price reduction. Therefore, sticky prices have an e¤ect similar to that of the fear of price wars that keeps prices high.

| Permalink


Post a comment