Abstract
Abstract In many markets, empirical evidence suggests that positive production cost shocks tend to be transmitted more quickly and fully to final prices than negative ones. This article explains asymmetric price adjustment as caused by firms imperfectly colluding on supra-competitive price levels. I consider an equilibrium in which positive cost shocks are transmitted instantaneously, whereas downward price adjustments only occur once aggregate market demand turns out unexpectedly low. This equilibrium exists whenever demand is sufficiently stable and negative cost shocks are not too large.
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