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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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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. 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.
  2. 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.
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  4. 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.
  5. Frederick C. Mills, 1927. "The Behavior of Prices," NBER Books, National Bureau of Economic Research, Inc, number mill27-1, Enero.
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  7. 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.
  8. 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.
  9. 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.
  10. Edward J Green & Robert H Porter, 1997. "Noncooperative Collusion Under Imperfect Price Information," Levine's Working Paper Archive 1147, David K. Levine.
  11. 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..
  12. 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 S71-85, April.
  13. Schmalensee, Richard., 1980. "Product differentiation advantages of pioneering brands," Working papers 1140-80., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  14. 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.
  15. 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.
  16. 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.
  17. 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.
  18. Maccini, Louis J., 1973. "On optimal delivery lags," Journal of Economic Theory, Elsevier, vol. 6(2), pages 107-125, April.
  19. Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
  20. 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.
  21. Victor Zarnowitz, 1962. "Unfilled Orders, Price Changes, and Business Fluctuations," NBER Books, National Bureau of Economic Research, Inc, number zarn62-1, Enero.
  22. Carlton, Dennis W, 1977. "Uncertainty, Production Lags, and Pricing," American Economic Review, American Economic Association, vol. 67(1), pages 244-249, February.
  23. 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.
  24. 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.
  25. Weiss, Leonard W, 1977. "Stigler, Kindahl, and Means on Administered Prices," American Economic Review, American Economic Association, vol. 67(4), pages 610-619, September.
  26. 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.
  27. Robert J. Barro, 1972. "A Theory of Monopolistic Price Adjustment," Review of Economic Studies, Oxford University Press, vol. 39(1), pages 17-26.
  28. 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.
  29. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  30. 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.
  31. Mills, David E & Schumann, Laurence, 1985. "Industry Structure with Fluctuating Demand," American Economic Review, American Economic Association, vol. 75(4), pages 758-767, September.
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