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Monopolistic competition and the cyclicality of pricing and productivity – a typology of industries. (English) Zbl 0782.90014

Summary: We develop a market model which explains how prices and productivity react to short-run demand variations when the number of price-setting firms is held fixed on its long-run level and profits are endogenous. We assume that for each firm the average production cost function is \(U\)- shaped, that customers are imperfectly informed about offer prices, 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, prices and price mark-ups respond countercyclically to demand variations (while input prices are exogenously fixed) 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, prices are procyclical while mark-ups remain countercyclical and productivity diminishes with any deviation of demand from its long-run level.

MSC:

91B24 Microeconomic theory (price theory and economic markets)
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