Market Power, Price Adjustment, and Inflation

26 Pages Posted: 1 Mar 2010

See all articles by Allen C. Head

Allen C. Head

Queen's University (Canada)

Alok Kumar

University of Victoria - Economics

Beverly J. Lapham

Queen's University

Abstract

We study a monetary search economy in which endogenous fluctuations in market power driven by changes in consumers' search intensity determine the extent of price adjustment to movements in productivity and the money growth rate. A calibrated version of the economy exhibits countercyclical fluctuations in markups and is consistent with the observed incomplete response of nominal prices to cost movements associated with productivity fluctuations and to changes in the money growth rate. Furthermore, a higher average rate of inflation results in a lower average markup and increases the sensitivity of prices to fluctuations in either productivity or money growth.

Suggested Citation

Head, Allen C. and Kumar, Alok and Lapham, Beverly J., Market Power, Price Adjustment, and Inflation. International Economic Review, Vol. 51, Issue 1, pp. 73-98, February 2010, Available at SSRN: https://ssrn.com/abstract=1560171 or http://dx.doi.org/10.1111/j.1468-2354.2009.00571.x

Allen C. Head

Queen's University (Canada) ( email )

Kingston, Ontario K7L 3N6 K7L 3N6
Canada

Alok Kumar

University of Victoria - Economics ( email )

Victoria V8W Y2Y, BC
Canada

Beverly J. Lapham

Queen's University ( email )

Kingston, Ontario K7L 3N6 K7L 3N6
Canada

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