Asymmetric price adjustments: A supply side approach

Abstract

Using a model of dynamic price competition, this paper provides an explanation from the supply side for the well-established observation that retail prices adjust faster when input costs rise than when they fall. The opportunity of profitable storing for the next period induces competitive firms to immediately increase their prices in anticipation of higher future input costs. This relaxes competition and firms earn positive profits. Conversely, when input costs are expected to decline, firms adjust their prices only after a cost reduction materializes, and the firms' incentives for price undercutting lead to the standard Bertrand outcome.

Strategic inventories under limited commitment

“…Although our model is deterministic in the spirit of Dudine, Hendel, and Lizzeri (), our results can be applied to a setting where demand evolves stochastically over time. The stochastic process may follow a mean reversion pattern, similarly to Antoniou, Fiocco, and Guo ().…”

Strategic Inventories under Limited Commitment

“…The stochastic process may follow a mean reversion pattern, similarly to Antoniou et al (2017). In Section 8 we discuss the implications of allowing for uncertain demand.…”