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

Listed author(s):
  • 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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File URL: http://www.nber.org/papers/w2178.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2178.

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Date of creation: Mar 1987
Publication status: published as Schmalensee, Richard and Robery D. Willig (eds.) Handbook of Industrial Organization, Volume 1. Amsterdam: North-Holland, 1989.
Handle: RePEc:nbr:nberwo:2178
Note: EFG
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  1. Mills, David E & Schumann, Laurence, 1985. "Industry Structure with Fluctuating Demand," American Economic Review, American Economic Association, vol. 75(4), pages 758-767, September.
  2. 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.
  3. N. Gregory Mankiw, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 529-538.
  4. Victor Zarnowitz, 1962. "Unfilled Orders, Price Changes, and Business Fluctuations," NBER Books, National Bureau of Economic Research, Inc, number zarn62-1, November.
  5. Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January.
  6. Eckard, E Woodrow, Jr, 1982. "Firm Market Share, Price Flexibility, and Imperfect Information," Economic Inquiry, Western Economic Association International, vol. 20(3), pages 388-392, July.
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  9. 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.
  10. 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.
  11. Hall, Robert E, 1978. "The Macroeconomic Impact of Changes in Income Taxes in the Short and Medium Runs," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 71-85, April.
  12. 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..
  13. 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.
  14. Blinder, Alan S, 1982. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," American Economic Review, American Economic Association, vol. 72(3), pages 334-348, June.
  15. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
  16. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  17. Schmalensee, Richard, 1982. "Product Differentiation Advantages of Pioneering Brands," American Economic Review, American Economic Association, vol. 72(3), pages 349-365, June.
  18. 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.
  19. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  20. Topel, Robert H, 1982. "Inventories, Layoffs, and the Short-Run Demand for Labor," American Economic Review, American Economic Association, vol. 72(4), pages 769-787, September.
  21. 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.
  22. 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 163-190, February.
  23. Vining, Daniel R, Jr & Elwertowski, Thomas C, 1976. "The Relationship between Relative Prices and the General Price Level," American Economic Review, American Economic Association, vol. 66(4), pages 699-708, September.
  24. Michael L. Wachter & Oliver E. Williamson, 1978. "Obligational Markets and the Mechanics of Inflation," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 549-571, Autumn.
  25. Robert J. Barro, 1972. "A Theory of Monopolistic Price Adjustment," Review of Economic Studies, Oxford University Press, vol. 39(1), pages 17-26.
  26. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  27. Weiss, Leonard W, 1977. "Stigler, Kindahl, and Means on Administered Prices," American Economic Review, American Economic Association, vol. 67(4), pages 610-619, September.
  28. Frederick C. Mills, 1927. "The Behavior of Prices," NBER Books, National Bureau of Economic Research, Inc, number mill27-1, November.
  29. Carlton, Dennis W, 1977. "Uncertainty, Production Lags, and Pricing," American Economic Review, American Economic Association, vol. 67(1), pages 244-249, February.
  30. 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.
  31. Domowitz, Ian & Hubbard, R Glenn & Petersen, Bruce C, 1986. "The Intertemporal Stability of the Concentration-Margins Relationship," Journal of Industrial Economics, Wiley Blackwell, vol. 35(1), pages 13-34, September.
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