Monopoly Power and Downward Price Rigidity under Costly Price Adjustment.
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A firm optimally determines its price and output level before demand is
observed, with an option to adju st the price at a cost after demand is
observed. A recursive solution to the firm's maximization problem
demonstrates that firms with a hi gh degree of monopoly power display
relative downward price rigidity and overproduce compared to a standard
monopolist, while the reverse applies to firms with low monopoly power.
Comparative statics analysi s shows that increases in adjustment costs and
decreases in demand va riability raise output for firms with high monopoly
power; the opposi te applies again to firms with low monopoly power. Copyright 1988 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research
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