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The Relative Rigidity of Monopoly Pricing

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  • Julio Rotemberg
  • Garth Saloner

Abstract

This paper seeks to explain why monopolies keep their nominal prices constant for longer periods than do tight oligopolies. The authors show that cost changes create a larger incentive for duopolists to change their prices, while demand changes tend to have a greater effect on a monopolist. When both costs and demand are affected by small changes in the overall price level, the cost effect dominates. In the presence of a small fixed cost of changing prices, therefore, duopolists change their prices in response to smaller perturbations in underlying conditions. Copyright 1987 by American Economic Association.

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Bibliographic Info

Paper provided by Massachusetts Institute of Technology (MIT), Department of Economics in its series Working papers with number 414.

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Date of creation: Apr 1986
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Handle: RePEc:mit:worpap:414

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Web page: http://econ-www.mit.edu/
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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), DEPARTMENT OF ECONOMICS, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
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References

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  1. Sheshinski, Eytan & Weiss, Yoram, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 44(2), pages 287-303, June.
  2. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, American Economic Association, vol. 76(4), pages 637-58, September.
  3. Simon, Julian L, 1969. "A Further Test of the Kinky Oligopoly Demand Curve," American Economic Review, American Economic Association, American Economic Association, vol. 59(5), pages 971-75, December.
  4. Akerlof, George A & Yellen, Janet L, 1985. "A Near-rational Model of the Business Cycle, with Wage and Price Intertia," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(5), pages 823-38, Supp..
  5. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  6. Olivier J. Blanchard & Nobuhiro Kiyotaki, 1985. "Monopolistic Competition, Aggregate Demand Externalities and Real Effects of Nominal Money," NBER Working Papers 1770, National Bureau of Economic Research, Inc.
  7. Olivier J. Blanchard & Nobuhiro Kiyotaki, 1985. "Monopolistic Competition, Aggregate Externalities and real Effects of Nominal Money," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 401, Massachusetts Institute of Technology (MIT), Department of Economics.
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