Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/68849
Authors: 
Zink, Helmut
Year of Publication: 
1991
Series/Report no.: 
Diskussionsbeiträge: Serie 1, Fakultät für Wirtschaftswissenschaften und Statistik, Universität Konstanz 255
Abstract: 
We develop a market model which explains how prices react to short-run demand variations when the number of active price-setting firms is held fixed on its long-run level. We assume that for each firm the average production cost function is U-shaped, that customers are imperfectly informed about the quality of offers, and that customers may search for better offers. For low degrees of market transparency the long-run market outcome exhibits price dispersion with an endogenous finite number of firms. In this case, in the short-run, price mark-ups respond countercyclically to demand variations and productivity is procyclical. In the complementary case of higher degrees of market transparency, in the long-run we have a single-price equilibrium. In that case, in the short-run price mark-ups fall with decreasing demand while productivity diminishes with any deviation of demand from its long-run level.
Subjects: 
increasing returns
monopolistic competition
business cycle theory
JEL: 
D40
D83
L11
Document Type: 
Working Paper

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