Gains from price rigidity

This paper shows that there are substantial gains from price rigidity in an imperfectly competitive economy. Firms can increase their profits by agree ing some markets as markets of long-term contracts, of which prices are det ermined in advance to other spot market prices. Although they determine pri ces non-cooperatively in both markets, the mutual commitment making some ma rkets' prices predetermined induces a price-price spiral between firms, whi ch results in substantial gains for both firms. These gains outweigh the co st of inflexibility arising from price rigidity even though demand fluctuat ion is large and marginal cost is increasing. JEL Classification Numbers: E 30, E32.