Asymmetric Price Rigidity and Inflationary Bias

Timur Kuran

This paper demostrates that the prices of firms with nonincreasing marginal cost and positive price adjustment costs are more rigid downward than upward, and that such firms raise their prices to a greater extent when they expect inflation than they lower them when they expect equivalent deflation. Underlying these findings is the property that the profit functions of such firms are asymmetric in price, in the sense that the loss from charging a price below the monopoly price is greater than the loss from charging a price above it by a proportionally equivalent amount.

American Economic Review, 73 (June 1983): 373-382.