A New Perspective on Asymmetric Cost Behavior

Abstract

The research on asymmetric cost behavior, despite its large body and fundamental importance, has evolved empirically and lacks a theoretical guidance. In light of this gap in the literature, we offer a novel theoretical framework for studying the phenomenon of cost asymmetry. Our study highlights the fundamental nature of cost asymmetry by showing that it is expected to emerge in equilibrium, even in a frictionless setting that is devoid of any known causes of cost asymmetry. This interestingly suggests that cost behavior is asymmetric by default, indicating that all the previously explored determinants of cost stickiness or cost anti-stickiness either enhance or counterbalance the already fundamentally arising cost asymmetry. On this ground, we additionally develop a capital market oriented theory that explores a new source for the empirically observed cost stickiness pattern by demonstrating a signaling mechanism that relies on managerial decisions of resource adjustment in response to demand shocks.

Keywords: cost behavior; cost asymmetry; cost stickiness; cost anti-stickiness; signaling; capital market signaling

JEL Classification: D21; D24; D82; M41