The Theory and the Facts of How Markets Clear: is Industrial Organization Valuable for Understanding Macroeconomics?

68 Pages Posted: 8 Aug 2007  

Dennis W. Carlton

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: March 1987

Abstract

This paper examines what industrial organization economists know and don't know about how markets clear. It reviews the empirical evidence which shows that, at least for some industries, price behavior is peculiar with prices failing to adjust over long periods of time. The paper discusses several existing theoretical explanations for the peculiar behavior such as fixed cost to changing price information asymmetries and theories of dynamic oligopoly. The paper goes on to develop some new theories to explain the observed behavior. The new explanations rely heavily on the importance of a seller's knowledge of his customers and on the optimality of non-price rationing. The paper discusses what relation, if anything, macroeconomics has to industrial organization.

Suggested Citation

Carlton , Dennis W., The Theory and the Facts of How Markets Clear: is Industrial Organization Valuable for Understanding Macroeconomics? (March 1987). NBER Working Paper No. w2178. Available at SSRN: https://ssrn.com/abstract=346983

Dennis W. Carlton (Contact Author)

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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