Gains from price rigidity

Authors
Citation
Kg. Nishimura, Gains from price rigidity, JPN ECON R, 51(1), 2000, pp. 95-110
Citations number
13
Categorie Soggetti
Economics
Journal title
JAPANESE ECONOMIC REVIEW
ISSN journal
13524739 → ACNP
Volume
51
Issue
1
Year of publication
2000
Pages
95 - 110
Database
ISI
SICI code
1352-4739(200003)51:1<95:GFPR>2.0.ZU;2-P
Abstract
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.