1981/10/01 by Louis J. Maccini
Economics, Econometrics and Finance · #Economic theories and models #Merger and Competition Analysis #Complex Systems and Time Series Analysis
paper · doi:10.2307/2526162
Recent empirical work on aggregate and industrial price behavior has been conducted within the framework of a static neo-classical theory of price formation.2 The purpose of this paper is to propose a more general theoretical framework for analyzing price behavior. The proposed framework is neo-classical in its basic characteristics, but unlike the recent literature it is based on a dynamic theory of firm behavior in which decisions on price, inventories and the capital stock are integrated. To serve as a basis for comparison with the model developed here, it is useful to state briefly the main propositions of the static neo-classical model. The model presumes that the typical firm behaves as if it were a simple monopolist that faces competitive factor input markets and sets its price so as to maximize current profits. Assuming a log-linear demand function and production function, the model yields the result that the firm's long-run optimal price policy in general is