COSTLY PRICE ADJUSTMENT AND STRATEGIC FIRM INTERACTION

This paper details the implications of costly price adjustment for str ategic firm interaction and the time series of prices. Such frictions introduce multiple equilibrium strategies which, in turn, help facilit ate collusion among firms. Collusive opportunities improve as product differentiation increases or markets become less competitive. Collusio n may or may not increase profits depending on whether the equilibrium selection is the most profitable subgame perfect equilibrium, or the renegotiation proof equilibrium. Independent of the equilibrium select ion, strategic incentives exist for firms to adjust prices in concert, and to be more responsive to shocks which lead to increased prices.