Nishimura, Kiyohiko G. (Faculty of Economics, University of Tokyo.)
Abstract
In many industrialized economies, there is sharp contrast between rigid prices in product markets and volatile prices in commodity and asset markets. This paper presents an explanation of this phenomenon in the framework of imperfect competition and heterogeneous expectations. However, the driving force of excessive price sensitivity is different between commodity and asset markets. In commodity markets where firms determine quantity and price equates demand to supply, seller expectation heterogeneity implies sensitive prices. In asset markets with high transaction costs, more buyer expectation heterogeneity means more sensitive prices. Market integration is shown to increase this price sensitivity.
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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number
97-F-30.
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