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Sticky prices as a coordination success

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  • Kenneth Mischel

Abstract

Recent contributions have articulated ways in which price rigidities signal breakdowns of coordination. These contributions are aimed at unifying New Keynesian economics by linking the issue of nominal price flexibility with that of between-firm coordination. By contrast, this paper demonstrates that sticky prices can signal a coordination success rather than a coordination failure. A model is developed in which N firms face a stochastic industry demand and engage in (infinitely) repeated Bertrand competition. In each period, firms are able to learn the realization of the demand shock but at a positive cost. The existence of two equilibria—one featuring sticky prices and the other featuring flexible prices—is proved. These equilibria are then compared. The equilibrium featuring sticky prices Pareto-dominates that featuring the flexible ones. Copyright International Atlantic Economic Society 1998

Suggested Citation

  • Kenneth Mischel, 1998. "Sticky prices as a coordination success," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 26(2), pages 162-171, June.
    • Handle: RePEc:kap:atlecj:v:26:y:1998:i:2:p:162-171
    DOI: 10.1007/BF02299358
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    References listed on IDEAS

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    1. Blinder, Alan S, 1991. "Why Are Prices Sticky? Preliminary Results from an Interview Study," American Economic Review, American Economic Association, vol. 81(2), pages 89-96, May.
    2. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    3. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, vol. 76(4), pages 637-658, September.
    4. Ball, Laurence & Romer, David, 1991. "Sticky Prices as Coordination Failure," American Economic Review, American Economic Association, vol. 81(3), pages 539-552, June.
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    Cited by:

    1. Richards, Timothy J. & Patterson, Paul M., 2004. "Causes of retail price fixity: an empirical analysis," Journal of Economics and Business, Elsevier, vol. 56(2), pages 117-136.

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