Price Stickiness under Menu and Convex Adjustment Costs

Qiming RAN, Ronald BALVERS

Research output: Journal PublicationsJournal Article (refereed)

Abstract

In a continuous-time model of the firm, menu costs imply immediate and full price adjustment as the menu costs become negligible relative to the present value of profits lost from no-adjustment- Appending convex price-adjustment costs, however, causes both types of costs to reinforce each other since quick adjustment is costly due to the convex component while slow adjustment is costly due to the menu cost component, as this cost is incurred throughout the adjustment period. We find that optimal firm behavior implies slow price adjustment which is incomplete in the long run, even in response to a large initial shock.
Original languageEnglish
Pages (from-to)269 - 277
Number of pages9
JournalJournal of Economics Research
Volume2
Issue number2
Publication statusPublished - 1997

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