>'Firms are quick to raise prices when their costs increase,
>but not so keen to reduce prices when their costs fall.'
>
>Talk to a non-economist, and you would probably get 80 per
>cent agreeing with this statement. Ask an economist, and
>you would probably get a more sceptical response. That is,
>until recently, after a wide range of careful empirical
>studies have shown that non-economists are indeed correct
>in their suspicions.
>
>The economist's scepticism is warranted since asymmetric
>price adjustment is a puzzle. Although monopoly power on
>the part of firms or retailers is often advanced as an
>explanation, it is not a very good one. Monopoly producers
>will choose their best price, and this moves symmetrically,
>in line with costs.
"Monopoly power" isn't necessarily the explanation. Retailers however are aware of a thing called "goodwill", which applies all the way down the chain of supply. An entrenched retailer has a certain amount of goodwill which I think is explained by something very simple in human nature. People are creatures of habit. We like to shop in the same place and after a while it becomes the habit.
Retailers also seem to prefer to retain existing suppliers, its easier, you don't have to think about it. This is a very pervasive pattern.
What I've noticed is that retailers can put up their prices substantially without much immediate effect on business. As long as you don't do it to those lines which are very sensitive. In the grocery business for example there are a small group of basic items which are very price sensitive, people notice the slightest variation. (Stuff like butter, sugar, etc.) I get the impression people unconsciously use these items as some sort of barometer. Cosequently, the margins are squeezed on such barometer items.
Aside from that, you can get away with murder - for a while. Eventually your long-standing customers will realize that prices are not quite in accord with what they have to pay elsewhere and they will start checking things out more carefully. But you can get away with it for a year or two sometimes. The problem of course is that if you exploit this, it also goes the other way - it will take just as long for buyers to notice your prices are lower and for you to get an increase in business. Basically, this amounts to cashing in your goodwill. (Its a neat trick to do this for a year before selling your business though. ;-)
This isn't strictly speaking a "monopoly effect" I think of it more as " market inertia".
Bill Bartlett Bracknell Tas
>This research provides an explanation for price asymmetry
>based on limited monopoly power. Bhaskar argues that in
>most markets, sellers have some monopoly power, but this is
>circumscribed by competition. Asymmetric price adjustment
>allows sellers to keep prices as high as possible, within
>the constraints imposed by competition.
>
>Although asymmetric adjustment makes for higher prices, the
>research also identifies a countervailing force. Since
>firm's prices will, on average, be too high when they do
>not adjust their price, firms will find it optimal to
>choose lower prices when they do adjust price. This
>mitigates some of the consequences of asymmetric
>adjustment.
>
>Nevertheless, prices on average will be higher.
>Consequently, the level of output in the economy as a whole
>will be lower and unemployment will be higher. Bhaskar
>quantifies the effect and show that while there is an
>output loss, it is relatively modest: for the UK economy,
>it is the equivalent of £1.3 billion per year, or £20 for
>every man, woman and child.
>
>
>
>###
>For further information, contact Professor V. Bhaskar on
>01206-872744 or email: vbhas at essex.ac.uk; homepage:
>http://privatewww.essex.ac.uk/~vbhas/ or Iain Stewart or
>Lesley Lilley at ESRC,
>on 01793-413032-413119 or email: iain.stewart at esrc.ac.uk or
>iain.stewart at esrc.ac.uk.
>
>The full study, 'Asymmetric Price Adjustment:
>Microfoundations and Macroeconomic Implications',
>Discussion Paper 547, Department of Economics, University
>of Essex is available at:
>http://www.essex.ac.uk/economics/discussion-papers/papers-text/dp547.pdf
>
>
>---
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