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Price Determination in a Competitive Industry with Costly Information and a Production Lag


  • Reuven Glick
  • Clas Wihlborg


We analyze the role of information for price and output adjustment when competitive firms with rational expectations cannot directly distinguish between industrywide and firm-specific cost disturbances. Firms may become informed about industrywide cost conditions by acquiring information at a cost. The sensitivity of price and output to cost disturbances decreases as more firms choose to purchase information. The equilibrium industry share of informed firms increases as the cost of information falls and total cost variability increases. The equilibrium share of informed firms is largest when there is a comparable degree of variability in both industrywide and firm-specific costs.

Suggested Citation

  • Reuven Glick & Clas Wihlborg, 1985. "Price Determination in a Competitive Industry with Costly Information and a Production Lag," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 127-140, Spring.
  • Handle: RePEc:rje:randje:v:16:y:1985:i:spring:p:127-140

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    References listed on IDEAS

    1. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
    2. Faulhaber, Gerald R, 1975. "Cross-Subsidization: Pricing in Public Enterprises," American Economic Review, American Economic Association, vol. 65(5), pages 966-977, December.
    3. Sharkey, William W. & Telser, Lester G., 1978. "Supportable cost functions for the multiproduct firm," Journal of Economic Theory, Elsevier, vol. 18(1), pages 23-37, June.
    4. Mirman, Leonard J. & Tauman, Yair & Zang, Israel, 1986. "Ramsey prices, average cost prices and price sustainability," International Journal of Industrial Organization, Elsevier, vol. 4(2), pages 123-140, June.
    5. ten Raa, Thijs, 1983. "Supportability and anonymous equity," Journal of Economic Theory, Elsevier, vol. 31(1), pages 176-181, October.
    6. John C. Panzar & Robert D. Willig, 1977. "Free Entry and the Sustainability of Natural Monopoly," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 1-22, Spring.
    7. William W. Sharkey, 1981. "Existence of Sustainable Prices for Natural Monopoly Outputs," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 144-154, Spring.
    8. Faulhaber, Gerald R & Levinson, Stephen B, 1981. "Subsidy-Free Prices and Anonymous Equity [Cross-Subsidization: Pricing in Public Enterprises]," American Economic Review, American Economic Association, vol. 71(5), pages 1083-1091, December.
    9. Baumol, William J & Bailey, Elizabeth E & Willig, Robert D, 1977. "Weak Invisible Hand Theorems on the Sustainability of Multiproduct Natural Monopoly," American Economic Review, American Economic Association, vol. 67(3), pages 350-365, June.
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    Cited by:

    1. McNulty, Mark S. & Huffman, Wallace E., 1996. "Market equilibria with endogenous, hierarchical information," Journal of Economic Dynamics and Control, Elsevier, vol. 20(4), pages 607-626, April.

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