Consider a firm with an arbitrary profit function whose relative price follows a Brownian motion with negative drift. When the firm faces a fixed cost of price adjustment, we prove the optimal pricing policy is a control band if the following sufficient conditions are met: the profit function is continuous, strictly concave and single-peaked; moreover, together with its first and second derivatives, it is bounded in absolute value by a polynomial. We also demonstrate various ways of constructing the value function associated with the control band policy and show it has certain properties carried over from the profit function. Numerical examples are found to be consistent with empirical estimates regarding the frequency of price adjustments. (Copyright: Elsevier)
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.
Volume (Year): 8 (2005) Issue (Month): 4 (October) Pages: 877-901 Download reference. The following formats are available: HTML
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Find related papers by JEL classification: E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Danziger, Leif, 1983.
"Price Adjustments with Stochastic Inflation,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 699-707, October.
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