EXPECTATION HETEROGENEITY AND PRICE SENSITIVITY

In many industrialized economies, there is sharp contrast between rigi d prices in product markets and volatile prices in commodity and asset markets. This paper presents an explanation of this phenomenon in the framework of imperfect competition and heterogeneous expectations. Ho wever, the driving force of excessive price sensitivity is different b etween commodity and asset markets. In commodity markets where firms d etermine quantity and price equates demand to supply, seller expectati on heterogeneity implies sensitive prices. In asset markets with high transaction costs, more buyer expectation heterogeneity means more sen sitive prices. Market integration is shown to increase this price sens itivity. (C) 1998 Elsevier Science B.V. All rights reserved.