Andrew Chamberlain points to a Ph.D thesis by Matt Lewis on search costs and asymmetric price adjustment. The idea is that firms face a kinked demand curve (more elastic for price increases than for price cuts), because consumers search when they see a price increase, but not when they see stable prices. As a result, prices tend to adjust more rapidly upward than downward.
That was my Ph.D thesis, also, 25 years ago, which tells you that the pace of progress in economics is not exactly breathtaking. I managed to get my paper published in Economic Inquiry in 1982, shortly after the idea appeared in a better journal, without citation of my work, by an assistant professor at Amherst (now a full professor there) who heard me outline the theory when he interviewed me on the job market in 1979-80.
Not that I’m bitter or anything.
For Discussion. What is the significance of asymmetric price adjustment for macroeconomics?
READER COMMENTS
Brad Hutchings
Apr 13 2004 at 4:04pm
Too funny!! The friends I usually go to dinner with Friday nights have noticed this phenomenon with respect to gas prices (there is a station’s price board in view out the window) for the past couple years. No economists or academics in the group though ;-).
-Brad
Boonton
Apr 14 2004 at 7:28pm
If prices cannot adjust upwards easily then a stimulus either by monetary expansion or by Keynesian fiscal spending would result in increased output rather than increasing inflation.
On the negative side, though, getting rid of inflation is more difficult because output will want to drop before prices do.
Randal Verbrugge
Apr 20 2004 at 11:25am
Boonton may be correct, but one also has to consider initial conditions, and interactions. Supposing iid shocks hit all industries; then over time, even if prices haven’t changed, underlying conditions have … and industries are all closer, or farther, from some threshold beyong which they will go ahead and adjust prices upwards. So it’s not entirely obvious that you get a big output change and a small price change across the board. I conjecture that for bigger shocks, the smaller the apparent asymmetry.
Furthermore, you only get this kinked setup for some kinds of price changes, i.e. when you are the only one adjusting. If conditions change markedly such that all firms will be forced to adjust, then – since everyone is changing their prices – you face the ordinary elasticity when you increase your price. Thus, the issue is coordination of price changes.
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