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Price Smoothing and Inventory

Author

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  • Yakov Amihud
  • Haim Mendelson

Abstract

This paper explains the phenomenon of price rigidity (or price smoothing) as the outcome of the optimal inventory policy of a multi-period profit-maximizing firm under demand and output uncertainties. Price smoothing may be manifested in two forms. First, price changes may be moderated with respect to those implied by the demand function; and second, the firm may choose to restrict price fluctuations by establishing upper and/or lower bounds on prices. We show that the extent of the asymmetry in price smoothing depends on the relationship between the inventory holding cost and the backlog penalty cost. Our model accommodates a wide range of price behaviour as observed in empirical studies on the issue.

Suggested Citation

  • Yakov Amihud & Haim Mendelson, 1983. "Price Smoothing and Inventory," Review of Economic Studies, Oxford University Press, vol. 50(1), pages 87-98.
  • Handle: RePEc:oup:restud:v:50:y:1983:i:1:p:87-98.
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    File URL: http://hdl.handle.net/10.2307/2296956
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    Citations

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    Cited by:

    1. Antoniou, Fabio & Fiocco, Raffaele & Guo, Dongyu, 2017. "Asymmetric price adjustments: A supply side approach," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 335-360.
    2. Wen, Yi, 2004. "General Equilibrium Analysis of the Supply of Capital," Working Papers 04-02, Cornell University, Center for Analytic Economics.
    3. Blinder, Alan S & Maccini, Louis J, 1991. " The Resurgence of Inventory Research: What Have We Learned?," Journal of Economic Surveys, Wiley Blackwell, vol. 5(4), pages 291-328.
    4. Yi Wen, 2007. "Production and Inventory Behavior of Capital," Annals of Economics and Finance, Society for AEF, vol. 8(1), pages 95-112, May.
    5. Wen, Yi, 2004. "Durable Goods Inventories and the Volatility of Production: Explaining the Less Volatile U.S. Economy," Working Papers 04-01, Cornell University, Center for Analytic Economics.
    6. Gu, Gyun Cheol, 2012. "Denial, Rationalization, and the Administered Price Thesis," MPRA Paper 42594, University Library of Munich, Germany.
    7. Gal Raz & Evan L. Porteus, 2006. "A Fractiles Perspective to the Joint Price/Quantity Newsvendor Model," Management Science, INFORMS, vol. 52(11), pages 1764-1777, November.
    8. Seidmann, Daniel J., 1985. "Target buffer stocks," European Economic Review, Elsevier, vol. 27(2), pages 165-182, March.
    9. Yi Wen, 2005. "The multiplier: a general equilibrium analysis of multi-stage-fabrication economy with inventories," Working Papers 2005-046, Federal Reserve Bank of St. Louis.
    10. repec:zbw:esthes:157989 is not listed on IDEAS
    11. Weiss, Christoph R., 1995. "Determinants of price flexibility in oligopolistic markets: Evidence from austrian manufacturing," Journal of Economics and Business, Elsevier, vol. 47(5), pages 423-439, December.
    12. Victor Zarnowitz, 1989. "Cost and Price Movements in Business Cycle Theories and Experience: Hypotheses of Sticky Wages and Prices (SEE ALSO WP3132-send out together)," NBER Working Papers 3131, National Bureau of Economic Research, Inc.
    13. Nitzan, Jonathan, 1992. "Inflation As Restructuring. A Theoretical and Empirical Account of the U.S. Experience," EconStor Theses, ZBW - German National Library of Economics, number 157989.
    14. Wen, Yi, 2003. "Understanding the Inventory Cycle: I. Partial Equilibrium Analysis," Working Papers 03-08, Cornell University, Center for Analytic Economics.
    15. Antoniou, Fabio & Fiocco, Raffaele & Guo, Dongyu, 2017. "Asymmetric price adjustments: A supply side approach," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 335-360.
    16. Jan A. Van Mieghem & Maqbool Dada, 1999. "Price Versus Production Postponement: Capacity and Competition," Management Science, INFORMS, vol. 45(12), pages 1639-1649, December.
    17. Wen, Yi, 2003. "The Power of Demand: A General Equilibrium Analysis of Multi-Stage-Fabrication Economy with Inventories," Working Papers 03-13r, Cornell University, Center for Analytic Economics.
    18. Nitzan, Jonathan, 1990. "Inflation and Market Structure," EconStor Preprints 157852, ZBW - German National Library of Economics.
    19. Eckalbar, John C., 1985. "Inventories in a dynamic macro model with flexible prices," European Economic Review, Elsevier, vol. 27(2), pages 201-219, March.
    20. Wen, Yi, 2003. "Durable Goods Inventories and the Volatility of Production: A Puzzle," Working Papers 03-12, Cornell University, Center for Analytic Economics.
    21. Qing Li & Derek Atkins, 2002. "Coordinating Replenishment and Pricing in a Firm," Manufacturing & Service Operations Management, INFORMS, vol. 4(4), pages 241-257, May.
    22. Qi Feng, 2010. "Integrating Dynamic Pricing and Replenishment Decisions Under Supply Capacity Uncertainty," Management Science, INFORMS, vol. 56(12), pages 2154-2172, December.

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