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Price Stickiness under Stochastic Demand

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  • Sheng-Yeh, Wu
  • Guan-Ru, Chen

Abstract

This study develops a two-period model in which the manufacturer determines a price floor and sets production output prior to resolution of uncertainty. The closer the distance between the minimum price and the high-demand-state price, the higher the degree of price rigidity. Solving for the minimum resale price and production output, the model indicates that asymmetric price transmission could be a characteristic of competitive markets. The retail price in a highly concentrated retail market might be lower than that in a retail market with fierce competition. The relationship between price adjustments and the market competition suggests that the reason underlying price rigidity should be considered while formulating the antitrust and monetary policies.

Suggested Citation

  • Sheng-Yeh, Wu & Guan-Ru, Chen, 2020. "Price Stickiness under Stochastic Demand," Bulletin of Applied Economics, Risk Market Journals, vol. 7(2), pages 109-117.
    • Handle: RePEc:rmk:rmkbae:v:7:y:2020:i:2:p:109-117
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    References listed on IDEAS

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    More about this item

    Keywords

    Price Rigidity; Price Floor; Uncertainty;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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