PRICE ADJUSTMENT AND MARKET-STRUCTURE

This paper shows how the extent of price inertia depends on the form of market competition. We first establish that the speed of price adjustment depends on the curvature of the profit function in the region around the optimum price. We then show how this depends on market structure. We prove the following results: (1) the speed of price adjustment depends positively on the price elasticity of demand; (2) the speed of price adjustment depends positively on the number of firms in a market; and (3) the speed of price adjustment depends negatively on the degree of collusion between firms.