Dynamic Price Adjustment Under Imperfect Competition

We study dynamic price adjustment under imperfect competition when consumers have non-time-separable preferences. In our model an intertemporal link arises in the consumers' maximization problems because current consumption decisions affect the utility of future consumption. Thus future demand depends on the current price and firms must take this into account when making their decisions. The main result is that equilibrium prices follow a dynamic stochastic process in which the current price depends on past prices and on random disturbances. The convergence of prices to the `long run expected price' is monotonic if current and future consumption are substitutes and oscillatory if they are complements.