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32 Antitrust Bull. 451 (1987)
Oligopoly Theory and Price Rigidity

handle is hein.journals/antibull32 and id is 451 raw text is: The Antitrust Bulletin/Summer 1987

Oligopoly theory and price rigidity
I. Introduction
There is general agreement that oligopolists can raise absolute
price above the competitive level; however, there is widespread
disagreement about whether oligopolists differ from more com-
petitive sellers in the formation of relative prices. This apparent
inconsistency underlies a paradox. If oligopolists have the market
power to control the level of price so as to optimize the value of
the firm, why is that power not exercised to control the rate at
which price adjusts, which also affects the value of the firm?
Price policy in markets of few firms embodies discretion and
cooperation, and should be concerned with present as well as
future revenues. There seems little question that coordinated
oligopolists can, if they wish, influence future revenues by regu-
lating the path of price change. The controversy centers on
whether they do, and in what manner. The most frequent asser-
tion is that oligopolists stabilize prices in response to what they
regard as temporary and short-run cyclical fluctuations in de-
mand. The existence of rigid prices is prima facie inconsistent
with market equilibrium, and can cause procyclical adjustments
in output and employment, which fall more in recession and rise
more in recovery than in a regime of flexible prices. If rigid prices
are, in fact, widespread and important, their role in generating
business cycles and as a disturbance to macroequilibrium should
be an issue for public policy.
Baruch College, The City University of New York.

, 1987 by Federal Legal Publications, Inc.

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