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- Title
Toward a Theory of Competitive Price Adjustment.
- Authors
Eden, Benjamin
- Abstract
The article presents the proposition of steps towards the theory of price adjustment in competitive environment. According to the theory, there exists a logical gap in the usual formulations of the theory of perfectly competitive economy, namely, that there is no place for a rational decision with respect to prices as there is with respect to quantities. The main cost of adjustment considered here is the cost of information about changes in aggregate excess demand. This public good aspect of the problem emerges when there is a unique optimal price which would be announced on the basis of "old" information shared by all participants. There is a process of advertising prices for the case in which the aggregate demand that sellers in a particular market face is exogenously given and infinitely elastic. It is possible to conclude that sellers who advertise a price which is different than the optimum under the initial prior, have bought information about actual demand. This provides an identification of the informed seller. The implication is that the informed seller will end up sharing the benefits of the information with other sellers.
- Subjects
PRICES; PRICING; COMPETITION; PRICE flexibility; COST; ECONOMICS; ADVERTISING; ECONOMIC demand; DEMAND function; PERFECT competition
- Publication
Review of Economic Studies, 1981, Vol 48, Issue 2, p199
- ISSN
0034-6527
- Publication type
Article
- DOI
10.2307/2296880