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Market Power, Price Adjustment, and Inflation

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  • Head, Allen
  • Kumar, Alok
  • Lapham, Beverly

Abstract

Endogenous fluctuations in mark-ups driven by changes in consumers’ search intensity are studied in a monetary search economy. These fluctuations in market power determine the extent to which real and nominal prices adjust to shocks to productivity and the money growth rate in the absence of costs or temporal restrictions on sellers’ ability to change prices. A calibrated version of the economy is consistent with several empirical regularities documented in the literatures on exchange rate pass-through and the cyclical properties of mark-ups. In particular, both the pass-through of cost movements to real and nominal prices and the adjustment of nominal prices to changes in the money growth rate are incomplete. Also, mark-up fluctuations may be either pro- or countercyclical depending on their source. Furthermore, a higher average rate of inflation results in both a lower average mark-up and increasing sensitivity of prices to fluctuations in either productivity or money growth.

Suggested Citation

  • Head, Allen & Kumar, Alok & Lapham, Beverly, 2006. "Market Power, Price Adjustment, and Inflation," Queen's Economics Department Working Papers 273565, Queen's University - Department of Economics.
    • Handle: RePEc:ags:quedwp:273565
    DOI: 10.22004/ag.econ.273565
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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