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The Theory and the Facts of How Markets Clear: Is Industrial Organization Valuable for Understanding Macroeconomics?

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  • Dennis W. Carlton

Abstract

This paper examines what industrial organization economists know and don't know about how markets clear. It reviews the empirical evidence which shows that, at least for some industries, price behavior is peculiar with prices failing to adjust over long periods of time. The paper discusses several existing theoretical explanations for the peculiar behavior such as fixed cost to changing price information asymmetries and theories of dynamic oligopoly. The paper goes on to develop some new theories to explain the observed behavior. The new explanations rely heavily on the importance of a seller's knowledge of his customers and on the optimality of non-price rationing. The paper discusses what relation, if anything, macroeconomics has to industrial organization.

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Bibliographic Info

Paper provided by Chicago - Center for Study of Economy and State in its series University of Chicago - George G. Stigler Center for Study of Economy and State with number 44.

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Date of creation: 1986
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Handle: RePEc:fth:chices:44

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Postal: UNIVERSITY OF CHICAGO, CENTER FOR STUDY OF THE ECONOMY AND THE STATE, 1101 E. 58TH STREET CHICAGO ILLINOIS 60637.
Web page: http://research.chicagobooth.edu/economy/
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References

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  2. Michael L. Wachter & Oliver E. Williamson, 1978. "Obligational Markets and the Mechanics of Inflation," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 549-571, Autumn.
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  5. Edward J Green & Robert H Porter, 1997. "Noncooperative Collusion Under Imperfect Price Information," Levine's Working Paper Archive 1147, David K. Levine.
  6. Telser, Lester G & Higinbotham, Harlow N, 1977. "Organized Futures Markets: Costs and Benefits," Journal of Political Economy, University of Chicago Press, vol. 85(5), pages 969-1000, October.
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  17. Vining, Daniel R, Jr & Elwertowski, Thomas C, 1976. "The Relationship between Relative Prices and the General Price Level," American Economic Review, American Economic Association, vol. 66(4), pages 699-708, September.
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  19. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October.
  20. Phelps, Edmund S & Taylor, John B, 1977. "Stabilizing Powers of Monetary Policy under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 163-90, February.
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  23. Weiss, Leonard W, 1977. "Stigler, Kindahl, and Means on Administered Prices," American Economic Review, American Economic Association, vol. 67(4), pages 610-19, September.
  24. Barro, Robert J, 1972. "A Theory of Monopolistic Price Adjustment," Review of Economic Studies, Wiley Blackwell, vol. 39(1), pages 17-26, January.
  25. Victor Zarnowitz, 1962. "Unfilled Orders, Price Changes, and Business Fluctuations," NBER Books, National Bureau of Economic Research, Inc, number zarn62-1, May.
  26. Demsetz, Harold, 1973. "Industry Structure, Market Rivalry, and Public Policy," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 1-9, April.
  27. Maccini, Louis J., 1973. "On optimal delivery lags," Journal of Economic Theory, Elsevier, vol. 6(2), pages 107-125, April.
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  30. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
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