Asymmetric price adjustments: A supply side approach

Abstract

Using a model of dynamic price competition, we provide an explanation from the supply side for the well-established observation that output prices react faster in response to input cost increases than to decreases. When costs decline, the opportunity of pro table storing in anticipation of higher future costs allows competitive fi rms to coordinate on prices above current marginal costs. The initial price response is only partial and pro table storing relaxes competition. Conversely, when costs rise, storing is not benefi cial in anticipation of lower future costs and fi rms immediately adjust their prices to current marginal costs, which entails the standard Bertrand outcome. Our results shed new light on the empirical evidence about asymmetric pricing and can stimulate further empirical investigation on this puzzle. Keywords: Asymmetric price adjustments, Bertrand-Edgeworth competition, Storage, Gasoline market. JEL Classifi cation: D4, L1.