98 BOOK REVIEW so useful for macroeconomics include a number of results of particular signiﬁcance for microeconomics. Hence this review. What are the theories which macroeconomists have proposed as reasons for price stickiness? The authors identify twelve as of 1988, all micro, all from macro- economists’ attempts to answer the question why prices are sticky. The theories, brieﬂy: Table I. 1. “Nominal contracts” “Prices are ﬁxed by [written] contracts” which last for a signiﬁcant period 2. “Implicit contracts” Absent written contracts, “ﬁrms tacitly agree to stabilize prices”, a ` la Okun 3. “Judging quality by price” Price cuts might signal quality reductions to customers 4. “Pricing points” Some “psychological signiﬁcance” attaches to certain prices “like $9.99” 5. “Procyclical elasticity” “Demand curves become less elastic as they shift in” 6. “Cost-based pricing” An increase in costs is reﬂected in increased prices but with “delays” as price changes move “through a multi-stage production process” 7. “Constant MC” A constant markup over a ﬂat MC, hence price changes are infrequent, even though demand shifts. 8. “Costly price adjustment” Price changes themselves incur costs (called “menu costs”) 9. “Hierarchy” Internal layers of management bureaucracy impose delays in decision making 10. “Coordination failure” “Firms
Review of Industrial Organization – Springer Journals
Published: Oct 15, 2004
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