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Modeling Price Rigidity or Predicting the Quality of the Good that Clears the Market

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  • Dennis W. Carlton

Abstract

To say that the price of some good is inflexible over time has little meaning if the "good" is changing over time. In this paper we concentrate on delivery lags as being the only dimension other than price that varies. We show how one can predict the relative importance of price and delivery lag fluctuations as equilibrating mechanisms. The complications of the theory as well as the surprising results underscore the complexity of predicting price behavior when the characteristics of the good are endogenous. The empirical results provide strong support for the theory that delivery lags are an important influence on market behavior and therefore that an understanding of their influence is crucial in predicting how markets will respond to supply and demand shocks.

Suggested Citation

  • Dennis W. Carlton, 1980. "Modeling Price Rigidity or Predicting the Quality of the Good that Clears the Market," NBER Working Papers 0503, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0503
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    References listed on IDEAS

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    1. Carlton, Dennis W, 1979. "Contracts, Price Rigidity, and Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 1034-1062, October.
    2. Victor Zarnowitz, 1962. "Unfilled Orders, Price Changes, and Business Fluctuations," NBER Books, National Bureau of Economic Research, Inc, number zarn62-1, March.
    3. 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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    1. Ducos, G., 1985. "Modèle macroéconomique de déséquilibre avec délais d’attente," L'Actualité Economique, Société Canadienne de Science Economique, vol. 61(3), pages 316-329, septembre.
    2. Gordon, Robert J, 1981. "Output Fluctuations and Gradual Price Adjustment," Journal of Economic Literature, American Economic Association, vol. 19(2), pages 493-530, June.

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