MONOPOLY POWER AND DOWNWARD PRICE RIGIDITY UNDER COSTLY PRICE ADJUSTMENT

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

MONOPOLY POWER AND DOWNWARD PRICE RIGIDITY UNDER COSTLY PRICE ADJUSTMENT Academic Article