MONOPOLY POWER AND DOWNWARD PRICE RIGIDITY UNDER COSTLY PRICE ADJUSTMENT

ABSTRACT A method of ‘backward deduction’ is used to analyse the decisions of a firm, setting price and quantity before demand observations are made, with the option to adjust price at a cost after demand is observed. It is shown for such a firm that the events of (1) downward price rigidity; (2) overproduction; and (3) a high degree of monopoly power are closely related. The paper distinguishes itself from the previous literature on costly …