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VARIABLE PRICE ADJUSTMENT COSTS
Author(s) -
Konieczny Jerzy D.
Publication year - 1993
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1993.tb01308.x
Subject(s) - economics , variable cost , fixed cost , benchmark (surveying) , econometrics , variable (mathematics) , microeconomics , simple (philosophy) , mathematics , philosophy , geodesy , epistemology , geography , mathematical analysis
The fixed (menu) cost approach has been criticized since administrative costs of price changes are small. This paper studies costs which depend on (i) the size or (ii) the frequency of adjustment. The optimal pricing policy is similar to that in the menu cost model which is, therefore, a simple benchmark case. While recent empirical evidence implies rejection of the fixed cost model, it is consistent with the general specification used here. The analysis strongly suggests that nominal inflexibilities at the individual level are not due to administrative costs but result from unfavourable market response to price changes.