PRICE ADJUSTMENT COSTS AND THE EFFECT OF ENDOGENOUS TECHNIQUE ON PRICE STICKINESS

This paper analyzes a monopolistic firm's pricing and choice of techni que decisions, when it faces a random demand and must incur a fixed me nu cost to adjust its price to demand shocks. We show that price adjus tment costs have the same effect as an increase in the variability of demand, in that the firm will choose a technique yielding a flatter sh ort-term marginal cost curve. Making the production technique endogeno us widens the range of demand shifts that will be accommodated with an unchanged price; it allows for less price variation and more quantity variation when it is profitable to pay the menu cost and adjust the p rice.