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The Theory and the Facts of How Markets Clear: Is Industrial Organization Valuable for Understanding Macroeconomics?

  • Dennis W. Carlton

This paper examines what industrial organization economists know and don't know about how markets clear. It reviews the empirical evidence which shows that, at least for some industries, price behavior is peculiar with prices failing to adjust over long periods of time. The paper discusses several existing theoretical explanations for the peculiar behavior such as fixed cost to changing price information asymmetries and theories of dynamic oligopoly. The paper goes on to develop some new theories to explain the observed behavior. The new explanations rely heavily on the importance of a seller's knowledge of his customers and on the optimality of non-price rationing. The paper discusses what relation, if anything, macroeconomics has to industrial organization.

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Paper provided by Chicago - Center for Study of Economy and State in its series University of Chicago - George G. Stigler Center for Study of Economy and State with number 44.

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Date of creation: 1986
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Handle: RePEc:fth:chices:44
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UNIVERSITY OF CHICAGO, CENTER FOR STUDY OF THE ECONOMY AND THE STATE, 1101 E. 58TH STREET CHICAGO ILLINOIS 60637.

Web page: http://research.chicagobooth.edu/economy/

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  1. Blinder, Alan S, 1982. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," American Economic Review, American Economic Association, vol. 72(3), pages 334-48, June.
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  7. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
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  12. Frederick C. Mills, 1927. "Introduction to "The Behavior of Prices"," NBER Chapters, in: The Behavior of Prices, pages 31-36 National Bureau of Economic Research, Inc.
  13. Frederick C. Mills, 1927. "The Behavior of Prices," NBER Books, National Bureau of Economic Research, Inc, number mill27-1, June.
  14. Eckard, E Woodrow, Jr, 1982. "Firm Market Share, Price Flexibility, and Imperfect Information," Economic Inquiry, Western Economic Association International, vol. 20(3), pages 388-92, July.
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  18. Oliver Hart, 1982. "A Model of Imperfect Competition with Keynesian Features," The Quarterly Journal of Economics, Oxford University Press, vol. 97(1), pages 109-138.
  19. Carlton, Dennis W, 1977. "Uncertainty, Production Lags, and Pricing," American Economic Review, American Economic Association, vol. 67(1), pages 244-49, February.
  20. Weiss, Leonard W, 1977. "Stigler, Kindahl, and Means on Administered Prices," American Economic Review, American Economic Association, vol. 67(4), pages 610-19, September.
  21. Topel, Robert H, 1982. "Inventories, Layoffs, and the Short-Run Demand for Labor," American Economic Review, American Economic Association, vol. 72(4), pages 769-87, September.
  22. Julio J. Rotemberg & Garth Saloner, 1985. "Strategic Inventories and the Excess Volatility of Production," Working papers 371, Massachusetts Institute of Technology (MIT), Department of Economics.
  23. Phelps, Edmund S & Taylor, John B, 1977. "Stabilizing Powers of Monetary Policy under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 163-90, February.
  24. Frederick C. Mills, 1927. "Appendix to "The Behavior of Prices"," NBER Chapters, in: The Behavior of Prices, pages 441-586 National Bureau of Economic Research, Inc.
  25. Telser, Lester G & Higinbotham, Harlow N, 1977. "Organized Futures Markets: Costs and Benefits," Journal of Political Economy, University of Chicago Press, vol. 85(5), pages 969-1000, October.
  26. Demsetz, Harold, 1973. "Industry Structure, Market Rivalry, and Public Policy," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 1-9, April.
  27. Maccini, Louis J., 1973. "On optimal delivery lags," Journal of Economic Theory, Elsevier, vol. 6(2), pages 107-125, April.
  28. Mills, David E & Schumann, Laurence, 1985. "Industry Structure with Fluctuating Demand," American Economic Review, American Economic Association, vol. 75(4), pages 758-67, September.
  29. Gould, John P, 1978. "Inventories and Stochastic Demand: Equilibrium Models of the Firm and Industry," The Journal of Business, University of Chicago Press, vol. 51(1), pages 1-42, January.
  30. Robert J. Barro, 1972. "A Theory of Monopolistic Price Adjustment," Review of Economic Studies, Oxford University Press, vol. 39(1), pages 17-26.
  31. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
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