Price Stickiness and Markup Variations in Market Games
22 Pages Posted: 26 Jan 2017 Last revised: 14 Oct 2017
Date Written: January 25, 2017
In this paper, we show that the Shapley-Shubik market game model with production naturally generates an equilibration mechanism that can accommodate price stickiness arising from strategic interactions of firms. Unlike New Keynesian models that show similar price stickiness results, the market game model does not require enforcing menu costs or other additional restraints on price adjustment mechanisms in order to generate price stickiness. As such, we suggest that the market game model can provide a good micro-foundation for macroeconomic analysis. We then explicitly show the relationship between a typical firm's markup of price over marginal cost and its market share.
Keywords: General Equilibrium, Market Game, Price Rigidity
JEL Classification: D43, D51, E12
Suggested Citation: Suggested Citation