City Research Online

Abstract

We propose a dynamic oligopoly pricing model, in which consumers’ choices exhibit inertia and firms face costly price adjustments. The primitives of the model are estimated using scanner data from the UK butter and margarine industry. We evaluate the effects of frictions on price dynamics, profits and consumer welfare. We find that price adjustment costs are substantial and represent between 24-34% of net margins. Our model predicts that absence of these costs reduces persistence in prices, increases firms’ profits but has little effect on consumer surplus. The effects of consumer inertia on prices are much more pronounced than when firms cannot adjust prices freely.

Publication Type:	Article
Additional Information:	This is a pre-copyedited, author-produced version of an article accepted for publication in The Economic Journal following peer review. The version of record will be available online at: academic.oup.com/ej
Publisher Keywords:	dynamic oligopoly, adjustment costs, price promotions, dynamic games
Subjects:	H Social Sciences > HB Economic Theory Q Science > QA Mathematics
Departments:	School of Policy & Global Affairs School of Policy & Global Affairs > Economics
SWORD Depositor:	Symplectic Administrator

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