Rigid monopoly prices

Research output: Chapter in Book/Report/Conference proceedingChapter

Abstract

A consumer in the real world typically must visit (e.g. by phone) a monopolist to observe its price, even though the consumer may have correct expectations about that price. This causes monopoly prices to be higher and stickier than is predicted by the textbook model. If visiting costs are small, and consumers do not observe the firm's costs, then prices conform to the textbook model when costs are high but are downwardly rigid when costs drop below a threshold. Price flexibility increases as the fraction of ignorant consumers, who observe their idiosyncratic valuations of the product only after visiting the firm, increases. In a repeated game, a 'ratchet' equilibrium, in which price increases are permanent and price decreases temporary within a certain band, supports equilibria for which price is rigid on the equilibrium path but which Pareto dominate the fluctuating one-shot equilibrium. The ratchet equilibrium has the advantages that price is a continuous function of past prices near the equilibrium path and the price coordination problem is solved in a natural way: the equilibrium price is the lowest price that can be sustained by such a ratchet. This equilibrium price exceeds but is close to the average prediction of the textbook model. Additional results are derived for the case in which costs are fixed.

Original languageEnglish (US)
Title of host publicationAdvances in Applied Microeconomics
Pages231-263
Number of pages33
Volume9
StatePublished - 2000
Externally publishedYes

Publication series

NameAdvances in Applied Microeconomics
Volume9
ISSN (Print)02780984

Fingerprint

Monopoly
Costs
Textbooks
Equilibrium price
Coordination problems
Cost model
Prediction
Price flexibility
Monopolist
Repeated games
Pareto

ASJC Scopus subject areas

  • Economics, Econometrics and Finance (miscellaneous)

Cite this

Stegeman, M. W. (2000). Rigid monopoly prices. In Advances in Applied Microeconomics (Vol. 9, pp. 231-263). (Advances in Applied Microeconomics; Vol. 9).

Rigid monopoly prices. / Stegeman, Mark W.

Advances in Applied Microeconomics. Vol. 9 2000. p. 231-263 (Advances in Applied Microeconomics; Vol. 9).

Research output: Chapter in Book/Report/Conference proceedingChapter

Stegeman, MW 2000, Rigid monopoly prices. in Advances in Applied Microeconomics. vol. 9, Advances in Applied Microeconomics, vol. 9, pp. 231-263.
Stegeman MW. Rigid monopoly prices. In Advances in Applied Microeconomics. Vol. 9. 2000. p. 231-263. (Advances in Applied Microeconomics).
Stegeman, Mark W. / Rigid monopoly prices. Advances in Applied Microeconomics. Vol. 9 2000. pp. 231-263 (Advances in Applied Microeconomics).
@inbook{1ae3fbf984844f56b1ed8cd8974cfb31,
title = "Rigid monopoly prices",
abstract = "A consumer in the real world typically must visit (e.g. by phone) a monopolist to observe its price, even though the consumer may have correct expectations about that price. This causes monopoly prices to be higher and stickier than is predicted by the textbook model. If visiting costs are small, and consumers do not observe the firm's costs, then prices conform to the textbook model when costs are high but are downwardly rigid when costs drop below a threshold. Price flexibility increases as the fraction of ignorant consumers, who observe their idiosyncratic valuations of the product only after visiting the firm, increases. In a repeated game, a 'ratchet' equilibrium, in which price increases are permanent and price decreases temporary within a certain band, supports equilibria for which price is rigid on the equilibrium path but which Pareto dominate the fluctuating one-shot equilibrium. The ratchet equilibrium has the advantages that price is a continuous function of past prices near the equilibrium path and the price coordination problem is solved in a natural way: the equilibrium price is the lowest price that can be sustained by such a ratchet. This equilibrium price exceeds but is close to the average prediction of the textbook model. Additional results are derived for the case in which costs are fixed.",
author = "Stegeman, {Mark W}",
year = "2000",
language = "English (US)",
isbn = "0762306874",
volume = "9",
series = "Advances in Applied Microeconomics",
pages = "231--263",
booktitle = "Advances in Applied Microeconomics",

}

TY - CHAP

T1 - Rigid monopoly prices

AU - Stegeman, Mark W

PY - 2000

Y1 - 2000

N2 - A consumer in the real world typically must visit (e.g. by phone) a monopolist to observe its price, even though the consumer may have correct expectations about that price. This causes monopoly prices to be higher and stickier than is predicted by the textbook model. If visiting costs are small, and consumers do not observe the firm's costs, then prices conform to the textbook model when costs are high but are downwardly rigid when costs drop below a threshold. Price flexibility increases as the fraction of ignorant consumers, who observe their idiosyncratic valuations of the product only after visiting the firm, increases. In a repeated game, a 'ratchet' equilibrium, in which price increases are permanent and price decreases temporary within a certain band, supports equilibria for which price is rigid on the equilibrium path but which Pareto dominate the fluctuating one-shot equilibrium. The ratchet equilibrium has the advantages that price is a continuous function of past prices near the equilibrium path and the price coordination problem is solved in a natural way: the equilibrium price is the lowest price that can be sustained by such a ratchet. This equilibrium price exceeds but is close to the average prediction of the textbook model. Additional results are derived for the case in which costs are fixed.

AB - A consumer in the real world typically must visit (e.g. by phone) a monopolist to observe its price, even though the consumer may have correct expectations about that price. This causes monopoly prices to be higher and stickier than is predicted by the textbook model. If visiting costs are small, and consumers do not observe the firm's costs, then prices conform to the textbook model when costs are high but are downwardly rigid when costs drop below a threshold. Price flexibility increases as the fraction of ignorant consumers, who observe their idiosyncratic valuations of the product only after visiting the firm, increases. In a repeated game, a 'ratchet' equilibrium, in which price increases are permanent and price decreases temporary within a certain band, supports equilibria for which price is rigid on the equilibrium path but which Pareto dominate the fluctuating one-shot equilibrium. The ratchet equilibrium has the advantages that price is a continuous function of past prices near the equilibrium path and the price coordination problem is solved in a natural way: the equilibrium price is the lowest price that can be sustained by such a ratchet. This equilibrium price exceeds but is close to the average prediction of the textbook model. Additional results are derived for the case in which costs are fixed.

UR - http://www.scopus.com/inward/record.url?scp=35448968996&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=35448968996&partnerID=8YFLogxK

M3 - Chapter

AN - SCOPUS:35448968996

SN - 0762306874

SN - 9780762306879

VL - 9

T3 - Advances in Applied Microeconomics

SP - 231

EP - 263

BT - Advances in Applied Microeconomics

ER -