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Customer Markets, Credit Market Imperfections and Real Price Rigidity

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Gottfries, Nils

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Abstract

According to standard theory, an increase in demand should raise prices of goods, given factor prices. Empirically, however, prices appear to be unaffected by short-run variations in demand. This paper suggests an explanation of this observation. If customers react slowly to price changes and credit markets are imperfect, prices may be unchanged or even fall when demand increases. The reason is that when demand is high, profits are high, and firms can compete more intensely for customers without increasing their borrowing. Copyright 1991 by The London School of Economics and Political Science.

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Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 58 (1991)
Issue (Month): 231 (August)
Pages: 317-23
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Handle: RePEc:bla:econom:v:58:y:1991:i:231:p:317-23

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  1. Domenica J. Marchetti, 1999. "Markup and the Business Cycle: Evidence from Italian Manufacturing Branches," Temi di discussione (Economic working papers) 362, Bank of Italy, Economic Research Department. [Downloadable!]
  2. Asplund, Marcus, 1995. "Risk-Averse Firms in Oligopoly," Working Paper Series in Economics and Finance 69, Stockholm School of Economics, revised 21 Sep 1999. [Downloadable!]
    Other versions:
  3. Gottfries, Nils, 1999. "Markets Shares, Financial Constraints, and Pricing Behavior in the Export Market," Working Paper Series 1999:15, Uppsala University, Department of Economics. [Downloadable!]
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  4. V. Bhaskar, 2002. "Asymmetric Price Adjustment: Micro-foundations and Macroeconomic Implications," Economics Discussion Papers 547, University of Essex, Department of Economics. [Downloadable!]
  5. Judith A. Chevalier & David S. Scharfstein, 1994. "Capital Market Imperfections and Countercyclical Markups: Theory and Evidence," NBER Working Papers 4614, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Hian Teck Hoon & Edmund S. Phelps, 2004. "A Structuralist Model of the Small Open Economy in the Short, Medium and Long Run," DEGIT Conference Papers c009_005, DEGIT, Dynamics, Economic Growth, and International Trade. [Downloadable!]
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  7. Pedro Dal Bó, 2001. "Tacit Collusion under Interest Rate Fluctuations," Theory workshop papers 357966000000000030, UCLA Department of Economics. [Downloadable!]
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  8. Asplund, Marcus & Eriksson, Rickard & Strand, Niklas, 2001. "Prices, Margins and Liquidity Constraints: Swedish Newspapers 1990-1996," Working Paper Series in Economics and Finance 470, Stockholm School of Economics. [Downloadable!]
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  9. Domenico Marchetti, 2002. "Markups and the Business Cycle: Evidence from Italian Manufacturing Branches," Open Economies Review, Springer, vol. 13(1), pages 87-103, January. [Downloadable!] (restricted)
  10. Lundin, Magnus & Gottfries, Nils & Lindström, Tomas, 2004. "Price and Investment Dynamics: An Empirical Analysis of Plant Level Data," Working Paper Series 2004:7, Uppsala University, Department of Economics. [Downloadable!]
  11. Pedro Dal Bo, 2002. "Three Essays on Repeated Games," Levine's Working Paper Archive 618897000000000038, David K. Levine. [Downloadable!]
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